This may be obvious, but councils have been active in entrepreneurial activity within their functions for a very long time. I get nostalgic about the days when I started my career as a public sector commercial lawyer when I would seek and find specific functions that enabled a council to do something positive in the community or to use its resources more efficiently, with the benefit of an income stream.

The tasks of being entirely familiar with the Local Authorities (Goods and Services) Act 1970 and the ever-increasingly stretched categories of ‘public body’ that councils could provide services to, pursuant to statutory instrument, were quaintly entertaining.  

It is still fun to pore over the Local Government (Miscellaneous Provisions) Act 1976 and to stumble across the literal miscellany of:

• section 11: production and supply of heat etc. by local authorities – including to ‘use, sell or otherwise dispose of heat produced or acquired or electricity produced by the authority by virtue of this section’;
• section 19: recreational facilities – including a ’local authority may make any facilities provided by it … available for use by such persons as the authority thinks fit either without charge or on payment of such charges as the authority thinks fit’; and
• section 38: use of spare capacity of computers of local authorities, where ‘computer’ is defined as ‘any device for storing and processing information’.

I was around in the 1990s when the courts curbed the excesses of council activity by saying the powers did not exist (e.g. hedge funds and guarantees). The New Labour Government introduced the power to trade (but through a company) under section 95 Local Government Act 2003 and the Conservative Government brought in the general power of competence (GPOC) which can only be deployed for commercial purposes through a company. Well-meaning as these initiatives may have been, they have had the effect of muddying the waters of municipal enterprise as they have become the first port of call for determining vires rather than being used (as they should) as icing on the powers cake.

Addressing failures in governance without quenching the flame

What has occurred in recent times is the proliferation of companies and other vehicles (e.g. limited liability partnerships) as vehicles for both projects and services, whether wholly owned by councils, jointly with other contracting authorities or with the private sector. Some have succeeded. Some have failed, for various reasons, including not having a robust business plan or secure governance arrangements in place, or having the wrong people as directors or executives in such ventures.

We are working with several councils to put in place the appropriate assurances. What we find is that the relationship between local authorities and such entities is a constantly evolving and learning space that relies upon its heart on competence, common understanding, relationship and mutual confidence.

Using the PLWB within the HM Treasury guidance

Councils may want to use their borrowing capacity from the Public Works Loan Board (PWLB) which is an internal function of HM Treasury to enable their companies or joint venture vehicles to invest in their businesses.

Under lending terms that came into effect on 26 November 2020, a council cannot access any PWLB funds, including borrowing for projects that are for entirely different purposes, unless the council’s section 151 officer provides an assurance that the council does not intend to buy investment assets bought primarily for yield. The latest guidance from HM Treasury was published on 12 May 2022 (the PWLB guidance).

The legal implications of improperly accessing the PWLB funding is that the section 151 officer will not have fulfilled their duty to arrange for the proper administration of the council’s financial affairs.

As the PWLB guidance explains: ‘The purpose of the PWLB is to offer long-term, affordable loans to support local authority investment in service delivery, housing, economic regeneration, treasury management, and occasionally preventative action, under the prudential regime.’ (from paragraph 2). The rest of the PWLB guidance unpacks this with examples of different scenarios given at the back of the guidance, including scenarios where the investment supports a direct policy purpose of a council, e.g. climate change-related priorities.  

The importance of powers and policies in creating the art of the possible

From a legal perspective all this points to being clear about which powers and duties (functions) are in play with any entrepreneurial activity of a council, including working through a company or other vehicle and supporting any investment proposition. The more that they can be linked to a specific function as well as the more general powers, the better.

Policy is also important, not just because it can unlock trading and investment activity but because it can positively drive procurement (e.g. wellbeing and inclusion) (see Clause 12 of the Procurement Bill) and provide the basis for the principles to be considered in the case of any subsidy under the Subsidy Control Act 2022.

Lawyers have a critical role in not just establishing the right governance framework but also that it all adds up. The task is persuading colleagues that it is good to talk early with their legal supporters.