In the face of continued challenge innovative local authorities are under pressure to find ways to raise new revenue, cut costs and improve the quality of the services they deliver. One way to address this is to spin-out a competitive local government service-line, creating a new venture which can be either publicly or privately owned.
Professional services firm KPMG has produced a Guide to Local Government Spin-Outs (PDF 756KB) for local authorities grappling with the challenge of improving the financial value of the services they deliver. It offers practical steps for exploring and creating alternative delivery models.
Kru Desai, KPMG’s Head of Local & Regional Government, says: “The local government spin-out revolution has yet to launch in earnest. Spinning-out was a centrepiece of the Open Public Services white paper but so far public service entrepreneurs have yet to break free.
“Against a backdrop of many pressures, most notably public spending cuts and an aging population, the potential benefit of spinning-out local services should be embraced. The local authority that spins out services can create a new revenue stream, while local authorities that buy services from the new spin-out stand to secure a better deal for the tax payer by gaining access to higher performing services at lower costs.
“Now is the time to take the brave decision to set a service free. It can take up to 18 months to spin-out a public service, so the faster the ‘go’ decision is taken, the faster the new revenues can be realised.
“By laying out the spin-out process, we hope to help debunk the myths around spin outs, or alternative delivery models, and help local authorities move aspirations into reality.”
KPMG’s guide covers:
What to Spin-Out
Services must be particularly competitive to incentivise other local authorities to replace their own.
Successful spin-outs have been in the fields of adult social care, leisure and education - areas where the main component is staff, not assets, which provides for a more straightforward process.
What to Spin-Out Into
Much focus has been on mutuals but they are not universally appropriate. A range of local authority services could benefit from being spun-out into different vehicles, such as joint ventures, companies owned by a local authority or those that are privately held.
The optimal structure is determined by factors including the nature of the services; the size and scale of the operation and its margins; the competitive environment; future funding requirements and whether assets are involved.
Despite the range of potential vehicles, the actual spin-out process is similar.
The Two-Stage ‘Incubator’ Approach
KPMG asserts that the least risky way to spin-out a local authority service is to use a two-stage approach where an interim ‘incubator vehicle’ is used; a Local Authority Trading Company (LATCO).
The incubator business is run on commercial terms, but under the protective umbrella of the local authority.
Caroline Haynes, KPMG public sector director, explains: “Incubating maximises the chances of achieving a fully independent NewCo. Over one or two years this stage can test and amend the spin-out’s business model, just like a start-up. It helps to avoid companies being fully spun-out prematurely, ensuring they are healthy and well-formed before they go to market for funding, in turn maximising the up-side to the local authority.”
Specific objectives of the incubator include determining the optimal bundle of services, establishing a competitive and profitable commercial model and developing a financial history, so facilities such as banking and office space can be secured and investors can assess the opportunity. It can also allow the local authority to provide infrastructure support including premises, IT and HR services at a pro bono or discounted rate.
The Set-Free Stage
Once the incubation period has achieved its goals, the local authority can spin-out the LATCO into an independent enterprise. Objectives at this stage can include securing capital investment, broadening the customer base to other public and potentially private sector organisations, and in some cases gifting or selling staff a stake in the business.
The One Stage Spin-Out
There are instances when a one stage process works, often when significant scale is involved. Last year’s spin out of Staffordshire’s education services into a joint venture with Capita, on which KPMG advised, is an example.
Caroline Haynes concludes: “Teaming services with commercial expertise and investment capital has the potential to deliver growth, by developing a platform for serving a wider customer base with high quality, value for money services.
“Despite a slow start, I am convinced spin-out ventures will become the model for future investment in local services.”
For further media information please contact:
Alison Anderson, KPMG Corporate Communications
T: 0113 254 2980 / 07733 453 065 E: email@example.com
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