Venture forth

The Treasury has issued guidance on joint ventures. Stephen Matthew explains the contribution this document will make to collaboration between local authorities and private sector partners.

HM Treasury has published its Guidance Note for Public Sector Bodies forming Joint Venture Companies with the Private Sector – a snappy title to remember. Published in March 2010, the guidance was issued in draft form in October 2009 for consultation.

The document replaces the self-same Guidance issued in December 2001, the difference being that the previous guidance note concentrated solely on the creation of corporate joint ventures under the so-called Wider Markets Initiative. The revised document goes much further and looks at issues around the creation of a wider range of corporate joint venture entities. To that extent, the new guidance reflects the growing trend towards diverse kinds of joint venture between public and private sector parties.

The Guidance should not be confused with a statement of policy. It contains a huge amount of very helpful guidance on the types of joint venture that can be established, and the various legal, financial and other technical issues that need to be considered. It also contains helpful examples of established joint ventures, together with descriptions of how to go about setting up a joint venture vehicle.

Allowing for the fact that the Guidance is not a statement of policy, it nonetheless contains the following statement: "Going forward the Government expects that a number of different delivery models may be used by public bodies to deliver infrastructure and public services in conjunction with the private sector."

This does, at least, reflect an expectation – and not one likely to change following the general election, whatever the result.

The Guidance does not recommend the best way to form a joint venture nor, inevitably, does it seek to address every single issue which may arise on a project-specific basis. That said, it is to be commended as a very helpful and practical tool for practitioners. For example, Annexes are given over to advice on matters such as: State Aid, Accounting Treatment, Intellectual Property Rights, Tax Issues, and Competition Law.

Any local government practitioner picking up the Guidance would do well to start at the beginning. It begins with an explanation of what is meant by a "Joint Venture". As one might expect, the text recognises that a joint venture can describe a range of different commercial arrangements between two or more parties, where each contributes resources to the venture; a new business is created in which the parties collaborate and share risks and benefits associated with the venture. The contributions may take the form of land, capital, intellectual property, people or equipment. As the Guidance highlights, the parties need to have a "shared vision" about the objectives for the joint venture.

Crucially, the Guidance then makes the key distinction between the formation of a joint venture under a purely contractual arrangement, and a joint venture in which a new legal entity is established. In answer to the question "When is a Joint Venture appropriate?" the Guidance says: "Joint Ventures are usually established because the parties have complimentary objectives and share a view of the nature and scope of its activities and the JV's longer terms objectives and benefits. This will need to be tested through the business case development and in most cases through a competitive procurement process. If this alignment of interests is not present, a JV is unlikely to be the best structure to use."

By contrast, as the Guidance puts it, if the public sector wishes to conclude arrangements which are clearly defined and limited in scope and with little or no potential for growth and diversification, or where risk transfer rather than risk sharing is sought, the public sector's objectives may be achieved more easily through a more straightforward contractual mechanism (or through PFI).

In short, the Guidance recognises that there will continue to be many situations in which it will be more appropriate for the public sector to meet objectives through the tried and tested route of a contractual arrangement – not the creation of a joint venture legal entity. The Guidance addresses this point rather well in its first Chapter. The Treasury view is that the formation of a joint venture entity will typically arise where the purpose is one of the following:

• Value capture – for example property development or the commercialisation of an existing activity, with the public sector taking an equity stake in the joint venture;
• Route to market – where the public sector may wish to exploit intellectual property or other assets through a "spin-out" company – with a desire to share in value capture; or
• Service delivery programmes – the management of a long-term programme of service delivery and/or investment in order to improve public service efficiency or achieve infrastructure investment (with the example of Local Education Partnerships being cited).

In setting out a generic example of a public-private joint venture, the Guidance gives a diagrammatic explanation of a joint venture legal entity established jointly by a public sector participant and a private sector participant, with a joint venture agreement and shareholders agreement underpinning their relationship. This diagram, and the subsequent commentary recognises the key distinction between the corporate governance and ownership of the joint venture legal entity, as distinct from the underlying commercial agreement which may exist between the public sector and the joint venture legal entity. It is further recognised that there will most likely be subsidiary contracts of many and varied kinds. In working through the different options for a joint venture structure, and leaving aside the contractual approach, the Guidance looks at, in particular, companies limited by shares, companies limited by guarantee, limited liability partnerships, and limited partnerships.

One section deals with the early consideration by a local authority of "vires". As one might expect, it points to the Local Government Act 2000, and the Well-Being Power, but highlights the prohibition on using this power to "raise money". It also states: "Local authorities also have power to trade in function-related activities, although any such trading premised on that power must be through a company rather than, e.g. a limited partnership or limited liability partnership".

Almost certainly this confirms prevailing views on the subject, although it may not be entirely helpful for the statement to be as unequivocal as this.

There is also a statement on the question of controls and delegation, being: "Public sector stakeholders and the relevant Monitoring Officer and/or Chief Executive, or the Accounting Officer need to be satisfied with the consequences flowing from the fact it will be setting up a joint venture that may have a separate legal capacity and have to be allowed by law to make its own decisions, employ people, and enter into contracts etc. Considerations should be given to any public accountability, ministerial responsibilities and audit requirements".

So what will this Guidance add to the overall picture, not least for local authorities? As touched on, the Guidance acknowledges the likelihood of more joint ventures in the future, particularly those involving the formation of legal entities. This is not new, and local government has been setting up companies for many years now. For local government lawyers, the Guidance is a valuable starting point on a whole range of points – both strategic thinking and more technical matters. It will not address every last point and will, of necessity, fail to recognise the unique factors bearing on a particular project. But if you need to get started, or be pointed to other guidance or even examples of what others have done, this document should be on your shelf somewhere.

Stephen is a partner at Nabarro (www.nabarro.com), specialising in PFI/PPP work and currently advising a number of local authorities on the establishment of joint venture structures.