LexisPSL Local Government, Peter Ware and Angelica Hymers consider the statutory powers available to local authorities to provide shared services, the risks associated with exercise of those powers, and how delivery of shared services can be achieved.
What are shared services?
Shared services are the consolidated delivery of services to public and/or private sector entities where previously those services had been delivered separately. The aim of shared services is to generate both financial and procedural efficiencies and improve the quality of the services which are being provided. Shared services have become increasingly popular in the public sector through central government initiatives, but also as a way of coping with increased demand for public services with fewer resources.
Powers of local authorities to provide shared services
In order to create and provide a shared service, the local authorities involved must ensure they have the statutory power to trade. This article focuses on general powers, as opposed to specific powers to trade.
Much of the legislative authority for local authorities to share services is contained in the Local Government Act 1972 (LGA 1972).
- section 111 of the LGA 1972 provides that a local authority may do "anything (whether or not involving the expenditure, borrowing or lending of money or the acquisition or disposal of any property or rights) which is calculated to facilitate, or is conducive or incidental to the discharge of any of their functions." This is limited to any activity which is necessary or reasonably necessary to discharge the relevant function
- section 112 of the LGA 1972 provides for the appointment of staff to discharge the statutory functions of the local authority or other local authorities
- section 113 of the LGA 1972 provides for the placing of staff at the disposal of other local authorities for the purpose of the other local authority fulfilling their functions
Where local authorities are entering into a collaborative arrangement, an alternative is to delegate statutory functions to a joint committee or to another local authority (s 101 of the LGA 1972 and ss 9EA and 9EB of the Local Government Act 2000). This is an area of administrative law which is complex and requires careful consideration before establishment.
In addition to the LGA 1972 powers local authorities also have a general power of competence under section 1 of the Localism Act 2011 (LA 2011). This power gives certain local authorities the express power to do anything that individuals generally do. This includes entering into agreements with other local authorities to provide shared services. The general power of competence may only be used where there is no pre-existing limitation on the use of a particular power.
General powers to provide shared services for profit
Local Government Act 2003, s 95
- local authorities intending to trade their shared services activities on a commercial basis may use the power contained in s 95(1) of the Local Government Act 2003 (LGA 2003) provided that the trading is function related
- the s 95 power requires local authorities to set up a company within the meaning of Part 5 of the Local Government and Housing Act 1989
- commercial trading is limited if the service is one which the local authority is under a statutory duty to provide (LGA 2003, s 95(2)(a))
- a comprehensive business case must be prepared and approved, (the Local Government (Best Value Authorities) (Power to Trade) (England) Order 2009, SI 2009/2393, reg 2), setting out:
- the objectives of the business
- the investment and other resources required to achieve those objectives
- any risks the business might face and how significant these risks are
- the expected financial results of the business, together with any other relevant outcomes that the business is expected to achieve
Preparation and approval of a business case is a legal requirement, separate and additional to the preparation of a business plan. This should be considered carefully, by any public body considering setting up a shared service
Localism Act 2011, s 4
- LA 2011 provides an alternative power under which to trade, but one which must be implemented through a company as defined in s 4
- section 4 provides limits a local authority to do things for a commercial purpose only if they are things which it may do otherwise than for a commercial purpose
- where something is to be done for a commercial purpose, it must be done through a company, either within the meaning of s1(1) of the Companies Act 2006 (CA 2006), or a registered society within the meaning of the Co-operative and Community Benefit Societies Act 2014 or a society registered or deemed to be registered under the Industrial and Provident Societies Act (Northern Ireland) 1969
- section 4(3) provides the same restriction on the power as under s 95(2)(a) of the LGA 2003, namely that the authority may not do something for a commercial purpose which it is under a statutory duty to do
- as with the general power of competence under s 1 of the LA 2011, the s 4 power is subject to any pre-existing limitations
Local Authorities (Goods and Services) Act 1970, s 1
The position is simpler where a local authority wishes to trade with other public bodies:
- there is no requirement to trade through a company where the power under s 1 of the Local Authorities (Goods and Services) Act 1970 (LA(GS)A 1970) is used. This allows local authorities and public bodies to enter into agreements for the authority to supply (amongst other things) 'administrative, professional or technical services' (LA(GS)A 1970, s 1(1)(b))
- the case of R v Yorkshire Purchasing Organisation ex p British Educational Suppliers' Association  ELR 195 confirmed that local authorities may use the power under LA(GS)A 1970 to trade for a profit.
This may be a suitable option where authorities are intending to restrict their trading activities to other public bodies. However, if an authority intends to expand its activities to trade with other entities, it may be required to set up a company
What happens if a local authority appears to act outside its powers? (Ultra Vires)
Local authorities are statutory bodies and may therefore only act as provided for in legislation. If a local authority does something which is outside of the scope of its statutory power, it is acting ultra vires. Strictly interpreted, the ultra vires doctrine provides that any action outside of the scope of direct statutory power is ultra vires and therefore unlawful.
However case law, codified in s 111 of the LGA 1972, provides that a local authority may do:
'anything (whether or not involving the expenditure, borrowing or lending of money or the acquisition or disposal of any property or rights) which is calculated to facilitate, or is conducive or incidental to the discharge of any of their functions.'
This wording expanded the boundaries of the powers of local authorities but there is still some limitation. In the case of R (on the application of Risk Management Partners Ltd) v Brent LBC  EWHC 692 (Admin) the issue arose from a procurement challenge from an unsuccessful bidder when Brent LBC tendered for insurances services. Bidders were invited to tender however the process was subsequently abandoned and the contract (of six lots) was awarded to London Authorities Mutual Ltd, a mutual insurance company of which Brent LBC was a member and helped to establish. The disgruntled bidder claimed that Brent LBC had no power under s 111 to establish and be a member of the mutual insurance company and therefore the award was not valid. The local authority was deemed by the court to have acted ultra vires. The court considered that s 111 does allow a local authority to take out insurance as this is incidental to their functions; however, providing insurance to others is not.
Where a local authority acts ultra vires (ie it acts outside of the scope of its powers, or where it exercises a power in a way which is contrary to the intention of statute) its decision may be challenged by way of judicial review, provided that the party bringing the challenge has sufficient interest to do so.
A challenge by way of judicial review may be brought under the following grounds:
- illegality (wrongful exercise of a power, including acting ultra vires)
- irrationality (making a decision which is fundamentally irrational or does not take into account relevant matters or takes into account irrelevant matters)
- procedural unfairness (failure to observe relevant statutory procedures or principles of natural justice)
- legitimate expectation
Where a judicial review claim against a public body is successfully made out, the courts may:
- set aside the decision (a quashing order)
- require the body to carry out its legal duties (a mandatory order)
- prevent the body from acting outside its powers (a prohibiting order)
- make a declaration of the legal position
- grant an injunction to prevent a body carrying out a certain action
- grant an award of damages
Structure of in-house shared services within a local authority
An in-house local authority shared service may take one of two forms. Internal departments may either:
- take advantage of a service provision which is centrally located but for which each department takes individual responsibility eg, departments which each have individual secretarial support may choose to locate that support centrally in order to implement common service standards, economise office space and generate savings in overheads. This cannot be said to be true 'shared services' because although the services are provided from a common area, they are not truly shared
- share staff and equipment that provide services in parallel across the authority. If this approach is taken then, in the example above, the departments will consolidate their secretarial support in a common location, the secretaries will work for all of the departments. This approach has the benefits of allowing the implementation of common service standards, but may also reduce duplication of work and allow reductions in the number of staff required, thus increasing efficiency and making costs savings for the authority. This may be done informally, or through a separate corporate vehicle with the authority can contract with for services
There are procurement issues to be considered if a separate corporate vehicle is used to provide services to a local authority. For more information, see Practice Note: The 'in-house' exemption.
Authorities will need to take into account a wide range of considerations when carrying out an analysis of the risks presented by a new shared services venture. While all authorities will have their own particular considerations, below are some of the key issues which should be taken into account:
- Are the services suitable for sharing? Not all services will be suitable for a shared service venture. For some specialist services, a bespoke service tailored to each authority's service provision and their service users is needed to produce the desired high level of public satisfaction. However, services which involve similar functions or processes, such as IT, HR, finance and customer services often translate well into a shared provision
- Is the shared service viable? Will departments/ authorities buy into it? Authorities will need to consider whether the shared service will be sufficiently used following implementation of the shared service to make it viable. This is particularly a risk where use of the shared service is optional and the parties can either choose to buy into the shared service or source their own service provision
- Are the implementation costs viable? One of the key considerations is whether the costs of setting up the shared service provision are proportionate to the benefit which the provision is expected to realise
- Does the authority have the powers to enter into the arrangement? All local authorities involved in the shared service must ensure they are acting within their powers. This includes restrictions within their constitution or standing orders. Considerations of powers are particularly relevant where a company is being set up to provide services.
- Will the authorities/departments be able to work together? Are they an appropriate cultural fit Authorities may differ on the processes to be implemented or the structure of the service as each may seek to discharge their function in a different way. There will also be a reliance on partner authorities for certain matters and some authorities may have more internal processes than others which must occur before a decision can be taken, causing delay. Authorities should ensure that these potential issues have been discussed prior to entering into any arrangements. They need to ensure that any agreement between the partners documents the ways in which the authorities will work together and includes a process for resolving disputes and the liability regime if the service provision is deficient and/or leads to third party liability
- What structure should be used? Authorities will need to consider carefully what structure is most appropriate to meet their needs. In the case of an in-house shared services venture, authorities may prefer to operate an informal arrangement based on internal reorganisation. For larger multi-authority ventures it may be appropriate to set up a company from which the services may be provided, even if the intention is not to trade the services commercially. This will allow the shared services to be provided independently of the partner authorities. The benefits of such an arrangement include ring-fencing risk and streamlining the decision making process. Where the authorities intend to trade services, or work with a private sector partner, a company will often be required by statute.
- Business planning: A thorough business plan will need to be drawn up covering all of the potential risks, and strategies for minimising and dealing with them. The partner authorities will need to consider the medium and long term future of the arrangements, and ensure that they have plans in place to deal with eventualities such as one of the partners leaving the arrangement, the service provision ceasing to be viable and other 'worst case scenarios'
- Legal and regulatory issues: Contracting authorities will need to consider whether competition law and State aid law applies to the trade they are proposing. They should also address the compliance requirements associated with their chosen business model, eg directors' duties under the CA 2006 (see below), as well as specific regulatory requirements applicable to the service in question (eg legal services regulation if the shared service includes the provision of legal services)
- What are the procurement risks if a third party provides the services? As contracting authorities for the purposes of the Public Contracts Regulations 2015 (PCR 2015), SI 2015/102, local authorities must comply with procurement law. In many cases where a third party is providing services, authorities will need to carry out a procurement exercise. In cases where a company is being set up to provide services to a number of authorities without any private sector involvement, it may be possible to structure the shared service venture in a way which takes advantage of one of the exemptions set out at regulation 12 of the PCR 2015, but there are limits to the application of these exemptions for authorities to be aware of. For further information see Practice Note: The 'in-house' exemption
- Operational risk: Consideration should be given as to what will happen to staff (including where they are to be accommodated) if the main provision of that service is to no longer be combined, along with the associated employment law implications
- Data-sharing:Local authorities must ensure they have the appropriate powers to share data. They must also decide how data, freedom of information and environmental information requests are to be managed. Any agreement between the parties should be drafted to reflect the agreed position
Conflicts of interest
Conflicts of interest most commonly arise in relation to shared services where a company has been set up to provide the services back to its controlling local authorities.
There is a risk of a conflict of interest where officers and/or members take on roles as directors of the company. This is because the individual's other duties resulting from their role at the authority may conflict with their obligations as a director.
As the director of a company an individual owes certain duties which are codified in Chapter 2 of Part 10 of the CA 2006.
In addition to complying with these duties, the director must act in the best interests of the company at all times (CA 2006, s 172(1)). This means that the individual owe a duty to the local authority but also to act in the best interests of the shareholders. Where these interests are not directly aligned a conflict of interest may arise.
It may be difficult to prevent conflicts of interest arising. To limit the risk of such conflicts, an authority may:
- reserve certain matters to itself in order to take potentially contentious issues outside of the remit of directors and make them shareholder decisions
- ensure that any local authority officers or members appointed to the company are fully aware of their duties and in particular the obligation upon them to report any potential conflicts of interest
- ensure that the company has sufficient numbers of directors who are not local authority members/officers to allow decisions to be made in the event that local authority directors are conflicted--however, this reduces the level of control that an authority has over the company
- consider taking out indemnity insurance for directors in order to protect their position in the event of a breach
The impact of shared services for local authorities
Local government is leading the way in the public sector with at least 96% of local authorities currently sharing services in some way.
The Local Government Association (LGA) produced a report in August 2012 entitled 'Services shared: costs spared?'' evaluating the success of five examples of shared services over the course of five years. The report identifies that:
- shared services are likely to be a more attractive offer to councils than outsourcing as they have the ability to retain more control
- there are substantial initial savings to be made with staff reductions and the removal of service duplications, then further savings to be made later on as a result of the establishment of best practice (however with these reductions comes expenditure, including redundancy packages, re-branding and ICT investment)
A report produced by the New Local Government Network in 2011 entitled Shared necessities: the next generation of shared services suggests that:
- even though the number of shared services is increasing, this process is happening quite slowly
- there are several reasons for the slow expansion of use in shared services across the country, namely:
- managers being adverse to implementing change which may cost themselves or colleagues their jobs
- the substantial differences across authorities in procedures, processes and technology
- politicians being unwilling to relinquish control over 'front of house' services
- rapid implementation of shared service arrangements would actually be better as it would help build momentum for change
Shared services can also be delivered to third parties and it is clear from the LGA report that this is happening across England. Authorities are then using the income from this to put back into delivery of core services. The increase in shared services in local government in particular, and the savings made from implementing a shared services model, is clearly evidenced in the Local Government Association Shared Services Map showing an extra £105m in savings through shared services between 2014 and 2015.
If the use of shared services is not sufficient to make the savings required of local authorities then other solutions such as establishing trading companies and commercialising services may assist, along with other innovative solutions.
This article was originally published in LexisPSL Local Government in partnership with Peter Ware and Angelica Hymers of Browne Jacobson LLP. If you would like to read more quality articles like this, then register for a free 1 week trial of LexisPSL.