Local Government Lawyer Insight July 2017 LocalGovernmentLawyer 24 "Commercial council" is a term heard increasingly in local government circles as authorities struggle to meet the cost of delivering services. We are heading for a situation where central government funding will cease and there will be three sources of income; Council Tax, National- Non Domestic Rates (NNDR) and whatever could be made from their own activities. The Local Government Finance Bill fell with the calling of the election, adding a degree of uncertainty as to the precise recipe for the future but one thing is fairly certain, budgets will be tight and authorities will continue to explore commercialisation as a route to raise much needed finance. Key risks The importance of good governance has long been recognised and fostered within local government. But the core purposes for which those principles have been fostered are the local government of an area and the delivery of public service functions in that area by a politically-led organisation funded by tax payers' money. Commercial business activity presents different challenges and risks and potentially may require different management, skills and governance models. And of course, there is the added tension of the interface between the two roles, public and commercial. Some key risk areas include: Financial failure: whilst the aim of commercial activity is to make money, success is not guaranteed and there is a risk that a business makes a loss. According to the ONS, the UK five-year survival rate for businesses born in 2010 and still active in 2015 was only 41.4%; in other words almost 60% of business start- ups closed within five years. Being a public sector-owned business does not protect a business and public money invested in it from financial risk. Looking back to one of the key local government vires cases of the 1990s, Credit Suisse v Allerdale BC [1996] 4 All ER 129,the nub of the case was that the joint venture company in which the council had invested and provided a guarantee made a loss and the bank sought to call in that guarantee. Reputational risk: this is another area where a council involved in a business activity is vulnerable. It will, by its very nature, be far more in the spotlight in the media and politically. Ethical, social and environmental issues may play differently. Financial exposure: commercial activity will heighten the council's exposure to claims for losses and damages from contract breach and negligence. The classic tool to mitigate financial risk in a business is to conduct it through a limited liability structure. Of course if the activity requires reliance on the Localism Act or the Local Government Act 2003 trading powers then that will be a requirement, though as drafted it does not permit the use of an LLP for this purpose. If there is a choice then the relative merits of a corporate structure in term of limited liability may need to be weighed against potential liability to Corporation Tax. But in addition to the limited liability a corporate structure can offer additional advantages to a council in terms of governance. The board can focus solely on successfully delivering the business of the company without being distracted by the public sector functions of the council. Its board can comprise a mixture of officers, whether based in the company or the council, and members. It could also have external non-executive directors Good governance in a 'commercial council' As more and more authorities are following the ‘commercial council’ model, Richard Auton and Kate Webster outline and evaluate the risks that come with the rewards.