13 July 2007
Restrictions on local authority borrowing have been gradually eased but one dinosaur law remains, which covers council companies and similar entities. Now its turn for reform has come in a new Bill
Council treasurers will be interested in much of the Local Government and Public Involvement in Health Bill because it underpins the next wave of modernisation for local government.
One area that has not received as much attention as it deserves is the proposed new arrangement for dealing with local authority companies and other entities, such as leisure trusts.
The current legal framework for these companies is complex and belongs to a different era of central/local government relations. It is set out largely in Part V of the Local Government Act 1989, as supported by the Local Authorities (Companies) Order 1995. This was primarily designed to support the former capital finance regime in Part IV of the same Act, which restricted the ability of local authorities to borrow. The Order added certain proprietary controls over matters such as transparency of ownership of the company.
Part V was never designed to be freestanding. It was put in place to prevent local authorities circumventing the restrictions in Part IV by borrowing through a company rather than borrowing directly. The Part IV regime was replaced by the prudential accounting regime under the Local Government Act 2003, which gave local authorities much more autonomy and removed direct restrictions on borrowing by companies.
Instead, each authority has to look at how it uses a company and whether that company can have full recourse to the local authority to support it, such as with a guarantee, or whether it is truly an arm's-length entity with no recourse. The risks of recourse are reflected in the local authority's accounts, which must behave 'prudently' in relation to that risk in line with the relevant Statement of Recommended Practice.
With discussions now actively taking place on how certain capital finance decisions might be devolved from the Treasury to a local level, the old Part V regime is a bit of a dinosaur. Attention is turning to more imaginative schemes where councils might borrow to fund economic growth in an area, for example, by improving transport, which itself leads to greater future tax revenues that could fund the original loan.
Another reason for changing or removing the Part V regime is that it is specifically targeted at companies. But there are other types of legal entity that can be used to borrow money and deliver services. As an example, some authorities have found that a limited liability partnership (which can be used to side-step corporation tax) is a more suitable entity. LLPs are not companies and as such fall outside of the Part V regime.
The way that the new Bill tackles the need for change is firstly to repeal the whole of the Part V regime (via Clause 240 and Schedule 18 of the Bill). It sets out a new regime in Part 12 ('Entities controlled etc by local authorities').
First of all, the term 'entities' is given a wide definition ('any entity, whether or not a legal person'). This ensures that the new regime not only covers any existing form of organisation but is 'future proofed' to take in any new and evolving arrangements undertaken by the public sector.
Next, it replaces the legal test, as to whether or not an entity should be deemed to be part of the local authority, with an accounting test, by linking the two whenever the relevant Sorp requires the local authority to include financial information about the entity in its own accounts.
This again should future-proof arrangements by allowing evolving accounting practice to determine the linkage.
The power is then reserved to the secretary of state to make an order that prohibits or regulates the taking of actions by those entities. This allows central government to monitor the use of different legal entities and to step in at a later date to regulate their usage if this is felt necessary.
It has already been announced that an order will be made to introduce 'proprietary controls', with greater restrictions depending on the level of control that an authority holds over a related entity. Clause 215 gives examples of the type of matters that might be controlled in that way.
Overall, the new proposals make a lot of sense. The old rules were becoming a barrier to greater local autonomy and more imaginative ways of delivering services. The new provisions should help to further modernisation and are to be welcomed.
Stephen Cirell is head of local government and Professor John Bennett is a Consultant Solicitor with Eversheds. They are authors of Best Value: law and practice
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