ALTERNATIVE SERVICE DELIVERY MODELS IN LOCAL GOVERNMENT

Better together Building a successful joint venture company Contents

Executive summary 1 Deciding to set up a JV 6 Setting up the JV 16 Making the JV successful 23 About us 29 Executive summary

Local government is continuing to innovate and change as it looks for ways to protect front line services. The changes are picking up pace as more local government bodies innovate by introducing alternative delivery models to generate additional income and save costs.

While these new models are not a There are well-publicised cautionary solution by themselves they do add to tales of public-private JVs that have Overall, JVs remain a viable ADM for local authorities. We have set the wider solutions being explored by attracted attention and debate; some out below our insight, based on our local government such as devolution, have ended earlier than planned research, that councils may wish to or have not delivered the intended collaboration and integration. take into account when setting up benefits. While this can detract from In September 2014 we published their own JVs. our first report on alternative delivery their potential as a viable model, many models (ADMs), ‘Responding to the councils are continuing to use this Our research indicates that the number of JVs will continue to rise, in challenge’, which examined a variety type of JV because they recognise that particular public-public partnerships of models that local councils were experienced commercial partners bring cost effective solutions. We agree with as proven models are replicated. JVs looking at to tackle the financial offer great opportunities for savings this, but only if the JV moves away challenges. Our next report ‘Spreading and income generation and can make from the traditional model of inflexible their wings: Building a successful more sense in some circumstances and complex contracts and both the local authority trading company’, than a LATC if the council feels it council and its partners are clear on published in April 2015, built on cannot operate alone. the objectives. Moving to a more this by exploring the use of trading collaborative JV partnership model can, If procured with enough innovation, companies. This is the next report if managed well, provide councils with creativity and collaboration in in the series and focuses on joint the commercial edge over any of the mind, they may also be capable of ventures (JVs) for service delivery. ADMs we have looked at, including delivering more than just profit, such JVs have been in use for many as wider community benefits. This local authority companies. years in local government and remain will be important as more councils There is also an emerging breed of a common means of delivering services seek to identify social as well as JV in which councils partner with other differently. They offer the opportunity financial returns. public sector bodies or commercial to deliver services with partners who, companies that are wholly-owned by the Treading the line between contract more often than not, bring something public sector: public-public JVs. They management and partnership working new to the table. Many of the JVs used offer the opportunity to benefit from may be a challenge, but the selection by local government have been public- scale and experience while being more of partner and building of trust will private collaborations, providing closely aligned to public sector values. be key. Our research has found that in many cases councils believe that either front or back office services. Our experience is that these types of JV they work better in a commercial While some have been successful, it are more aligned to partnership working, setting when working in partnership, is true to say that they have a mixed by offering a better cultural alignment rather than operating alone. As one reputation, particularly where they and a focus on community benefits as observer noted: “it is better to have have focused on the contractual well as profits. As these are relatively 50% of something rather than 100% aspects of the relationship rather than new, the partnership and commerciality of nothing”. the partnership element. outcomes have yet to be proven.

Building a successful joint venture company 1 We have researched a range of JVs for But not all public-private JVs this report to provide inspiring ideas have been successful Capita from those that have been a success There is also reason to be cautious. The London Borough of Barnet and lessons learnt from those that have Our research found a number of JVs has an outsourced contract with between public and private bodies encountered challenges. The report also Capita for the delivery of some of had mixed success in achieving provides information about the key its services but the two partners areas to consider when: outcomes for councils. In particular, have also set up Regional Enterprise • deciding to set up a JV JVs involving multiple back office (Re), a JV for the development • setting it up services were prone to difficulties. and regulatory services in the • making it successful. Similarly, we have seen that JVs used borough, to enable the council to in transformational programmes have benefit financially from the profits Key messages not always delivered intended benefits. anticipated from the commercial Success stories are more common in opportunity that the partners have Public-private JVs can bring JVs that have a narrow remit – for identified, as it has a 49% stake in significant benefit example one service rather than a range the business and representation on the JV board. JVs continue to be a viable option. of services – or focus on a front line Where they have been successful they service such as catering. have supported councils to improve A key reason for failure is service delivery, reduce costs, bring objectives lacking alignment, which We identified a number of JVs, set up investment and expertise and generate is particularly prevalent in public to to deliver services in a particular way, income. In our experience a JV can be private JVs. This is primarily because that hadn’t been responsive to the the right model when a council does the private sector partner’s primary council’s changing agenda, objectives not think it can achieve its particular focus is always profit, whereas the or circumstances. This had resulted in objectives alone, for example when it local authority often has a range of both sides reaching for the contract and needs particular expertise or investment objectives. If councils are looking to set the JV ultimately failing. such as improvements to IT systems. up a JV it should have a blended set of Usually, councils are the minority Successes include: CATERed, objectives covering income generation, partner in these JVs. While this brings which has reduced costs for Plymouth service improvement, cost cutting, less risk it also brings less control and City Council, and London Borough transfer of commercial skills and new ability to influence the partnering of Barnet’s JV (Regional Enterprise), investment. These need to be aligned company’s direction. An inflexible which generates profits for the council. to the objectives of its partner and response from the majority shareholder Similarly, Nottinghamshire County included in the articles of association can frustrate the council as it seeks Council has chosen a JV model for its of the JV. to respond to financial pressures and highways as it allowed retention of The cultural fit and responsiveness lead to a significant deterioration in control within the public sector and of the chosen partner are as important relationships between the partners. the future sustainability of the service. as any considerations about There can be a blurring of the roles So there are some clear reasons to be commerciality, as their omission can and responsibilities of the council in its optimistic about the future of JVs. negate the opportunities that scale, different capacities as both traditional expertise and investment bring. commissioner and strategic partner.

2 Building a successful joint venture company The correct governance architecture, If the key driver is cost reduction then beyond just the shareholding, is outsourcing or shared services may Civica paramount. This should strike the be a more appropriate model. Most The three South Worcestershire right balance between taking sufficient transactional services lend themselves districts’ outsourced contract with control to ensure the council’s needs more easily to these models because Civica has enabled benefits to be are met at a reasonable cost and they are easier to define and follow realised more quickly than any other allowing the partner the necessary a simpler set of key performance model, according to their business freedom to act to achieve them, such indicators (KPIs) that can easily be case. It enables the three authorities as working in a partnership rather than measured. In contrast, JVs are more to achieve bonuses when more solely enforcing a contractual model. successful if cost savings are combined contracts are signed, giving them In setting up the JV, there needs with a growth or income-generation some of the benefits of a JV through to be an awareness that the JV will objective. a contract with a private sector contract directly with the council to Being a commercial partner to a provider rather than a separate provide services. Our discussions public sector body is not always easy. company model. indicated that contract development The commercial partner will need to and negotiation were both complex make a profit to satisfy shareholders and costly. When difficulties arose with and will want to maintain commercial performance, or changes were needed confidentiality. As the council is both a to the service, there was a tendency partner and a purchaser of services this from both parties to ‘reach for the can create tensions. contract’. This inflexibility linked to In reality, there will always be an the complexity of contracts often leads uneasy tension for councils in a JV that to disputes and misunderstandings is pursuing a profit margin as well as and consequently makes the providing services back to the council relationship more fragile and prone under contract. This issue needs to be to break-up. The partnership element managed from the beginning of the JV of the JV should have come into play by aligning objectives and ensuring significantly before this point. partnership working is supported by the appropriate governance. While “Don’t get confused with there needs to be sufficient governance outsourcing – back office to protect the council and the public transactional services don’t lend interest, this should be balanced with sufficient commerciality to drive themselves to joint ventures.” improvement, additional income and Southwest One cost reduction. For many public to private JVs this has been a difficult line to walk.

Building a successful joint venture company 3 Public-public JVs are a new breed This new breed of public-public JV, in which councils Our research has demonstrated that public-public JVs can partner with wholly-owned companies of other councils, be more successful at working and staying together. In part is becoming increasingly popular. For example, Cormac this is as a result of combining common cultures, but in (a wholly-owned company of Cornwall Council) is about many instances councils already have good collaborative to embark on a JV with Nottinghamshire County Council relationships. In our experience there is also less tension for to deliver its highways service. This will be the first JV for councils as a partner in a profit-making public-public JV, as Cormac. Norse (the wholly-owned company of Norfolk ultimately all profits are returned to the public purse. County Council) also operates this model. This type of The Coventry and Solihull Waste Disposal Company JV provides the opportunity for councils to partner with is a good example: it was established in 1992 and continues companies that bring both the scale economies and expertise, to operate with both councils achieving their respective combined with the public sector ethos. objectives. Key success factors are the flexibility and joint We are seeing that as these companies grow, they are working developed by the partners, alongside shared seeking out opportunities to partner, and there are several objectives that effectively combine service delivery and have discussions currently underway. However, these JVs are a wider focus than simply profit making. relatively new and it remains to be seen how successful they However, while two councils may collaborate well will become in the longer-term. together they do not always have the commercial expertise of a private sector organisation and may not realise all the economic benefits that a more commercial operator would bring. In reality there is often a trade-off between collaboration and profit.

“Creating the right environment for maintaining the alignment of strategic objectives and exploring how the venture can maximise benefits to all parties was important.” Coventry Metropolitan Borough Council

4 Building a successful joint venture company Key success factors

Taking the following into account will help to ensure the success of a JV:

Deciding to set up a JV Making the JV successful • Be clear on your objectives. The market will need clear • Create a culture of trust and strong working information about the council’s requirements to enable it to relationships. There should be a ‘one team’ ethos respond in a meaningful way between the council and the JV and an understanding of the • Be ambitious. If you are setting up a JV then you need to importance of communication across all stakeholders. In our have clear objectives around income growth, cost savings and experience, silences are filled with questions and uncertainties value to the community such as job growth. If all you want to misinterpreted as significant risks. Communicating clearly do is deliver savings then consider whether outsourcing would is key and having all stakeholders on board can be critical be better to success • Be ready to work in partnership. This is not simply a • Focus on the key outcomes. If the objectives are income contract, it is a partnership and needs to be viewed as such generation, improved service performance and cost reduction, by both sides if it is to be successful ensure that scrutiny is held at this level and does not fall into an assessment of inputs or performance indicators • Carry out due diligence. The council needs to properly understand the existing services, their associated financial • Allow the JV to operate independently. The JV must be costs and where the opportunities are for growth or cost able to operate outside of the council, focusing on income savings growth alongside improved service delivery and cost reduction for the council. The temptation to make the JV another • Obtain professional advice and support. For most corporate directorate that acts in the same way as others councils this will be their first JV. There are issues that will needs to be resisted need to be dealt with including state aid, management, people and pensions. Advice and support early on will avoid costly • Ensure appropriate corporate structure and governance mistakes in later stages arrangements. The JV’s corporate structures should allow it to operate in a commercial manner with non-partners and in a Setting up the JV partnership manner with the council. From a council’s point of • Ensure that the procurement process is effective. view it should have the necessary oversight and arrangements Time needs to be taken during the procurement process to in place to identify risks in the JV and to ensure performance test the partnering arrangements and to ensure any evaluation remains high, but without having to revert to the contract criteria are aligned to the objectives set for the JV. Councils • Take into consideration the local politics. need to be confident that the procurement process is capable Political administrations change from time to time, so having of delivering the right JV partner all political parties in agreement that the JV is the right thing • Revisit the objectives with your partner. All parties need to to do will provide stability for the future be clear on what they want to achieve with a clear vision of the • Get the right level of performance management. future and how they will grow and adapt together Councils will need to think clearly about what they want to • Share profits and risk. It should not be possible for one measure. The performance arrangements will inevitably drive party to benefit at the loss of the other partner. For example, the behaviour and priorities of the JV, so they need to be excess profit clauses or the requirement to share the costs closely aligned with what it is hoping to achieve of redundancy or service reduction should be built into the • Planning the exit. There are a number of reasons that a agreement partner may choose to exit from a JV. Whatever the reasons, • Anticipate future changes. The environment in which the the closure process is complex and can damage services and JV works will change. Mechanisms need to be put in place to relationships. Clarity is needed from the outset regarding how address future tensions; not just formal dispute processes, but and under what circumstances the venture will come to end also regular meetings and guiding principles for how to expect to manage the relationship and allow it to evolve in time • Build flexibility into contracts and articles of association and performance monitoring arrangements. Councils seeking increased efficiencies put additional pressure on joint arrangements. This has been particularly evident with private sector partners where the contract has not allowed sufficient provision for such changes

Building a successful joint venture company 5 Deciding to set up a JV

What is a JV and why would you create one? “The joint venture route has to be the right business thing to do, JVs comprise a range of different rather than the best compromise between outsourcing and a LATC.” commercial structures that involve two Southwest One or more partners. In local government both back office and front line services, intended outcomes. This has caused they are usually formed either for a all at different stages in their lifecycle; other councils to be wary of choosing specific project, or for the ongoing from those starting up to those coming this option. It can be challenging delivery of council services; we focus to an end as their objectives are met or to strike the right balance between on the latter in this report. Some of they no longer meet the business needs contract management and partnership them also enable business and services in a changing environment. The most working to ensure that the council’s to be added to the portfolio of the common services provided through a objectives are not compromised. JV over time in accordance with pre- JV are set out below. Typically, councils have a minority agreed mechanisms within the contract. JVs can be beneficial. But there are shareholding in JVs which can make Our research has covered JVs many examples, often high profile, it more difficult to challenge the delivering a range of council services, where they have not achieved their other partner.

Most common services provided through a JV

Payroll IT Human resources Road repairs Finance and maintenance

Property Revenues management and benefits Schools catering

6 Building a successful joint venture company Structures for the JV invariably look to the council to than the equity split; consensus There are a several models available provide the solutions in the event of between partners should be achieved (shown in the table below), but the any issues with the JV, rather than the through working together rather than most common form of JV is a company other partner, because, often, it will still a focus on the ownership proportion. where each party invests, ie takes need to provide those services to the It is a reality that greater voting rights shares in the company (limited by public or be reliant on the back office can help to retain control, but if the shares), or where each party guarantees services being provided by the JV. partnership is working well this should the company’s liabilities up to a fixed The ownership structure is not be necessary. amount (limited by guarantee). an important determinant of the An effective governance framework Setting up a JV company provides governance arrangements. For provides protection and ensures there both parties with some protection example, in some cases a 50:50 is accountability for both parties. in the form of limited liability in the ‘deadlock’ JV may be deliberately This typically includes documents event that the JV fails. However, no structured to provide both parties with such as shareholder agreements and corporate structure can protect from equal voting rights. In our experience, memoranda of understanding which the reputational damage that may the collaborative relationship between set out expectations and responsibilities ensue if it does fail. Stakeholders the two partners is more important of both parties to the common

Types of JV model Contractual partnering Suitable where there are clearly defined tasks to be undertaken, likely to be relatively static and less flexible.

Company limited by shares Limited partnership This is a flexible and familiar structure with a Not a separate corporate simple mechanism for the introduction for new entity and can be inflexible, equity/transfers. There is limited liability for however limited liability shareholders with reward linked directly to for partners and a risks taken, generally in direct proportion to flexible basis for profit the proportion of shares held. Governance distributions. and minority protection or reserved matters may need to be considered.

Company limited by guarantee Limited liability partnership Flexible structure for a non-profit Corporate body with limited distributing venture. It is easier for liability with a flexible basis for profit members to join and leave, with rewards distributions and return of capital. There is linked directly to risks taken. May prove more a lack of case law in the event of a dispute difficult to attract investment. and there are potential limitations for local authorities to trade through a partnership.

Building a successful joint venture company 7 goals. It is also usual to have certain ‘reserved matters’ that require the Southwest One CATERed participants’ approval. These should be confined to strategic rather than Southwest One is 85% owned by For CATERed it was important to operational decisions, for example IBM and the council had concerns ensure that all 67 of the schools relocation or local procurement that it did not have enough influence involved had a voice without the requirements. Effective strategic and the JV did not have full governance arrangements becoming accountability. To provide sufficient collaboration can distinguish a JV too complicated. This has been control for all the partners, it achieved by setting up a company from other models and deliver strong included ‘reserved matters’ within which is owned by the schools on outcomes for each partner. Clear the constitution (see page 22) the basis of one school – one vote. governance arrangements underpin the to give sufficient control of key The company, Plymouth Schools collaboration and are essential to the strategic decisions. An example Shareholding Company Limited, is success of the JV. of this in force occurred around limited by guarantee. The company The nature of a JV means that the relocation, where the council did owns 49% of CATERed and the various stakeholders have different not want jobs to be moved out of council owns 51%. CATERed is roles, needs and levels of interest. Somerset, although this would have limited by shares. The CATERed Elected members may have an interest an adverse impact on growth and board comprises eight teachers in securing the quality of services for therefore was not consistent with and two council officers. the right price and require a level of the objectives of the JV. information that informs their policy decisions. A private sector partner The board’s remit is to manage the This will ensure that conflict protocols will by necessity focus on commercial business and operate in the interests of and procedures are understood. considerations as they need to make the company. This responsibility may Equally important is the council’s a profit to remain in business. The well conflict with elected members’ role as a client and how it intends to council is both the commissioner of JV primary focus on what they consider undertake and manage its actions with services and a partner in the JV which is best for the council. The council the company. makes decisions. The governance should consider how it will appoint As the JV matures, it is good arrangements need to: give assurance to its representatives to the board to practice to revisit the governance the council that its objectives are being ensure that duties to the council and requirements periodically. Do the met; be flexible enough to ensure that the company are discharged effectively. structures in place continue to provide the JV can deliver its business plan; and There are other mechanisms, such as the right balance between control and minimise conflicts of interest. Clarity a shareholder committee, that may freedom to operate, along with the over how the ‘client’ role and ‘partner’ be used to facilitate accountability. right information to enable effective role of the council are to be discharged Training for board members before the decision making? The governance is essential. company is set up is recommended. arrangements will inevitably need to evolve over time to ensure that they continue to be relevant for the company and its owners.

8 Building a successful joint venture company Objectives, outcomes and ambition It is important to be clear about the “Enable head teachers to focus on the core business of providing objectives of the JV. Potential partners children with a high-quality education rather than wondering require clear information about the whether the peas have been delivered for lunch.” council’s requirements to enable them CATERed to submit the most appropriate bid. We have set out below the most If the council wishes to retain ambitions for wider gains such as common reasons for setting up a control – and all the associated risk income growth and/or value to service JV. All of the JVs we looked and reward – a trading company the community. at were able to show delivery against may be more appropriate. Similarly, Some JVs arise from a need to these reasons, although, of these, the if the objective is simply to cut costs continue to provide public services, but desire for ‘quicker transformation of then outsourcing may be the most in a way that more closely aligns with services’ tended to be the most difficult appropriate model. financial constraints and how budgets to achieve. Be ambitious: before making any are devolved. The public-public JV Collaborating with a partner decision, the council must be clear of CATERed is an example of how who has complementary abilities and about the intended purpose of the JV. changes in funding to schools produced resources, such as finance, distribution It must be able to articulate its a real need for the existing schools channels or technology, can make ambition for the JV and the service(s) meal service to work with schools good sense. JVs offer the opportunity the JV will be providing. For example, and help them decide how best to to share risk and reward. Trading is the key objective revenue generation, meet their obligations. The JV would separately, with shared commercial promoting social value, improving not be sustainable without a critical skills, the JV may be able to access service quality or reducing costs? mass of schools receiving its meals opportunities which the council may It is not simply agreeing which services service. Equally, for each school, it was not have been able to achieve alone. are to be provided. It is focusing on important that this change in funding JVs are not suitable in all situations. the objectives and outcomes that are did not place an additional burden on expected from the JV. JVs are unlikely head teachers. The clarity of the shared to be the best option if the objective is objectives has helped ensure the JV is purely cost saving. Typically, successful maturing well. JVs are created where the council has

Common reasons for setting up a JV

• Quicker transformation of services • Greater investment in infrastructure/assets than the council operating alone • Generating savings and return of profits back to the council • Greater income generation opportunity, bringing a greater commerciality to a service • Developing expertise and skills of council staff • The desire to work in partnership with a provider who brings expertise and scale economies

Building a successful joint venture company 9 Be ready to work in partnership It is also important to consider opportunities elsewhere in the local In setting key outcomes and agreeing the ability and appetite of the council economy. The council’s partner in the the services to transfer, thought needs to collaborate rather than contract JV cannot be expected to take the risk to be given to how the services will manage. JVs are a partnership and of significant potential changes. The relate to the rest of the council. For a willingness of both sides to work relationship and understanding the example, how will transformation together and to change is a key environment in which each operates programmes be co-ordinated across ingredient of a successful JV. Lack and what they are each required the JV and the council. Will the JV of clarity on this issue has caused a to deliver, alongside appropriate be treated as a separate company or number of JVs to flounder, so councils contractual mechanisms which allow is it expected to act as a directorate need to be clear about their own ability sufficient flexibility, are particularly of the council? If it is the latter, in to work in partnership and to avoid important in managing and sharing the our experience, it is unlikely to be reaching for the contract every time costs of these changed circumstances. successful. there is a problem. As we outlined in our ‘Spreading Carry out the due diligence “Budgetary pressures mean their wings’ report, there are other Once all of these areas have been that generating income is options. All of the different potential considered, a business case needs to be developed for the JV. Due diligence necessary and a JV model is a options should be considered first, to ensure that this model is the best fit. For is critical; there should be a clear sustainable way of achieving this example, a LATC, outsourced contract understanding of the existing services, requirement. It is also important or informal collaboration (which their associated financial costs and to keep some degree of influence provides flexibility and the opportunity opportunities for growth or cost over the service.” to respond in a more agile fashion to savings. The business case should set out Nottinghamshire County Council changes in the local landscape) may be more appropriate. The suggested the benefits of the JV over its lifetime It is a reality that in transferring approach for an options appraisal is set and give assurance to stakeholders services to the JV the council will and out in ‘Spreading their wings’. that all key considerations have been should lose some control over their The circumstances of the council taken into account, for example future day-to-day management. The JV and perhaps the partner organisation income streams based on market needs to be able to change and explore will change over time. Clarity is needed assessment. This is often neglected, different operating models without at the start with regard to how the but it is important to understand the risk of unnecessary direction partners will manage these changing how the market will respond and from the council. Some councils are circumstances, adjusting both the the procurement process that may uncomfortable with the thought of objectives of the JV and the associated best deliver the requirements. The losing control of services. If this is contracts to meet the changed business case should also be capable of the case then JVs are unlikely to be circumstances of the partners. A key demonstrating the wider benefits to be the ideal solution. In making this question to ask is ‘Will the JV restrict realised, rather than purely the financial. decision councils will need to balance the council’s ability to be flexible in the It is important to obtain their desire for innovation and cost future and affect its ability to respond professional advice and support in the reduction against their wish to retain to changes in the local landscape?’. early planning stages to avoid costly direct control. These may include changes of political mistakes further down the line. administration or new commercial

10 Building a successful joint venture company Key considerations for the planning stage

Strategic direction What are the JV’s objectives and how will the company be managed?

Business activity What will be the core levels of activity for council services and beyond? Is there a tension between delivering improved services to the council and concentration on securing new business streams? How will profits or losses be shared? Who will own any intellectual property created by the JV? How will disputes between the JV partners be handled?

Financial planning How will the JV be financed at the start? Is existing baseline information accurate and correct and are any assumptions made realistic? Where are the milestones for further investment and what will happen if additional funding is needed in the future? Will finance be available to support business growth? Are all the elements that impact upon the venture’s cost base identified and included in the costing analysis? Are the assumptions that underpin these costs reliable or appropriately reflected in scenario planning?

Employment matters Who will work for the new venture and how will potential issues around staff transfer and pensions be resolved? Is a plan in place to deliver cultural alignment? What is the long-term development plan for staff?

Support services How will support services be provided and at what cost?

Assets What assets and other resources, including intellectual property, will each party contribute? Who owns the assets and what is their value? What happens to the assets on exit?

Governance What arrangements are appropriate to give the parties sufficient assurance, providing a balance between control and freedom to operate? What controls are proposed at board and shareholder level? Which innovations in governance such as service user or staff forums have been considered?

Markets How will the parties ensure they can continue to deliver the objectives against a changing financial backdrop, economic environment or changes in government policy? What factors are so critical they could render the JV unsustainable (eg is it heavily dependent on particular income streams) and are these critical factors featured in scenario planning? Are demand assumptions reliable or appropriately reflected in scenario planning?

Measuring outcomes What performance management arrangements will be appropriate? Can they be measured in the immediate short-term or will some of the benefits take a longer time to realise? How is the JV appropriately incentivised to perform?

Exit strategy What exit routes will be available if either party wants to realise its investment in the JV, or wind it up because it is no longer achieving, or has already achieved its intended purpose? What are the realities of the service transition and does any exit plan appropriately reflect the complexities of unravelling longer-term arrangements?

Building a successful joint venture company 11 Legal powers and state aid market value or follow a procurement for it to be a success. Operating a JV JVs are typically set up under the route to prevent issues with state aid necessitates input from the council general power of competence contained arising. However, it is important to throughout the whole lifecycle of a in Section 1 of the Localism Act 2011. consider all aspects of the transaction JV from the procurement stage to There are various structural options and complete a state aid assessment to eventual exit. Many councils or their which provide both the council and determine whether it may be an issue, partners have reduced their capacity the other party with some control. or whether there is any leakage of state and capability in recent years and This may be the creation of a company aid further down the transaction chain. may realise that they don’t have the limited by shares or guarantee, or a There are often ways to resolve such necessary in-house skills to procure partnership. There may also be other issues if sufficient time is allowed to and manage contracts. Identifying this associated legal issues to be considered take legal advice at the outset. before entering into any JV is essential, such as what can be contracted out because it is difficult to bring in this to any partner and which statutory Management expertise at a later stage. There are duties the council may need to ensure A JV requires a strong management many instances where JVs have not are being appropriately discharged in team with commercial acumen. Often delivered intended benefits because accordance with its duties. the partner is able to bring this skill so the council has not managed the State aid legislation governs it is important to understand to what contractual relationship effectively, that whether financial support from state extent this will be required. Depending is, the operational perspective has not resources can be granted to companies on the situation, external recruitment been considered. There should be no and JVs. These rules prohibit state may be needed. This is particularly surprises for either party; the financial aid, in whatever form, which could important if a key objective of the JV is models, contractual mechanisms, distort competition and affect trade to grow beyond contracting back to the governance arrangements and anything by favouring certain undertakings council. It is also important to ensure else must be clearly understood by all or the production of certain goods. that there is sufficient knowledge of involved in delivery, both within the JV Examples of state aid are the giving of contract management retained in the itself and in any council retained client- loans, grants, subsidies or provision of council to ensure that it is delivering side function. support services below market rates, or the desired outcomes. granting of business rate exemptions. The degree of staffing and skills Councils therefore need to pay close required to run the JV should be attention to what support they will considered at the outset as specific provide to any JV in which they are skills – such as procurement and taking part. Many JVs are set up at a project management – are needed

12 Building a successful joint venture company Case study 1

Entrust – Staffordshire County Council JV with Capita

Staffordshire County Council’s education support services Crucial factors to success were: political support; had an annual budget of around £60 million, but was keeping the workforce informed; and keeping the work in caught in a ‘perfect storm’. The value of work had reduced Staffordshire. The council wanted a minority shareholding in the previous two years and there was concern over the to facilitate commerciality, but sufficient to ensure that the job security of all the 4,500 employees. Schools were council’s voice was heard. They therefore agreed a 49:51% becoming more independent and education outcomes split of equity. increasingly important. The council looked at options Entrust started in 2012/13 and has grown considerably including a trading company, but felt that they wouldn’t be since then – supporting over 600 schools, up from the commercial enough on their own. However, they did see a original 400 at creation of the JV – and is performing well. big commercial opportunity in education support services The route to growth is proving to be different to that initially and identified a £19 billion market that they could access. envisaged. Instead of acquiring large services from other Key factors were education outcomes, revenue generation local authorities, the business is growing incrementally and innovation of education to promote better outcomes. with new schools, clusters of schools and chains coming Having identified a JV venture model as the preferred on all the time. The council is confidently anticipating vehicle, they used external support to carry out soft further growth and while at some point in the future it might market testing with a range of suppliers. The process consider realising its investment, that day is a long way also included discussions with private equity houses. off and the council is giving no thought to exit at the With 20 different services to bring across, this was a big present time. undertaking. Without a track record the business was not initially attractive to private equity houses. Negotiations with the shortlisted potential partners followed and identified that Capita brought forward lots of good ideas, was prepared to invest to improve services and shared the same strong vision as the council. Discussions with the unions and pensions were important – particularly around risk sharing.

Building a successful joint venture company 13 People CATERed opted to transfer its Most JVs include the transfer or “You’ve got to control staff under TUPE. The 51% control secondment of people from the council. the rumour.” of the JV by the council enabled the As we highlighted in ‘Spreading their CATERed JV to remain a scheduled body within wings’, a change to a more commercial the LGPS. This meant that staff culture will be needed if the JV is to There is no fixed model for how people being transferred could continue to be successful. The JV will need to be are moved into the JV. For example, benefit from this scheme. The council focused on delivering to its ‘client’ Southwest One chose to second people was also able to transfer associated (the council) and, in many cases, into the JV from the public sector pension assets and liabilities to the in generating new business. Both partners rather than transferring people company. Other upsides to TUPE leadership abilities and the behaviours under TUPE. CATERed choose to include the ability to renegotiate terms of the people in the JV will determine transfer its people under TUPE. There and conditions with new staff, and to the success of the new business. In the are advantages and disadvantages to implement cultural change. midst of the transaction, it is easy for both choices. A clear decision is needed at the these ‘softer’ changes to be forgotten, Secondment creates less uncertainty start of the process as to whether the but the JV will not be successful for people as they still feel connected to JV will move away from council terms without them. the council and it removes the need to and conditions, including the LGPS To achieve as smooth a transition make changes to pension arrangements over time for both the people currently as possible, communication with those with the local government pension providing the service and for new involved throughout the process is scheme (LGPS). On the downside it starters. Councils need to balance the extremely important. Even if those means that there is no opportunity potential cost savings, the release of delivering the project think there is to discuss with people changes to monies to deliver better services and nothing to say it is better to report terms and conditions that could the terms and conditions offered to what they can. More often than not, make the JV more successful and people working in the JV. silence is filled with rumour and create opportunities for individuals. speculation. It is vital to understand Secondments also make cultural and respond to the key concerns that change harder to implement. Without people and stakeholders raise. These this increased commerciality or focus will inevitably vary depending on on improved service delivery it will the circumstances. In the case of one be harder for the company to be JV, rebranding was seen as crucial to successful. differentiating the new company from the council. As a result, a key priority for people was a new uniform. In other “There is no fixed model for how people are moved into the JV.” cases, the priority has been to ensure that staff continue to be able to identify with the council and to maintain those close relationships rather than promote a separate identity.

14 Building a successful joint venture company Pensions Pensions are often seen as a significant issue for any transfer of council staff to “The council should have a a commercial entity due to the scale of the pensions strain, but the issues are sufficient understanding of not insurmountable. the partner’s transition plans The council should have a sufficient understanding of the partner’s transition so that any impact on pensions plans so that any impact on pensions can be assessed. Unless these are clearly can be assessed.” set out, there can be misunderstandings that can prevent the JV proceeding. For example, costs savings may be predicated on a reduction in staff through redundancy, but unless this has been communicated, it may not be included in any financial models and could adversely impact the success of the JV due to pensions liabilities not being taken into account. Future pension schemes and the potential for liabilities can have a significant impact from a financial perspective, especially if there are significant number of staff in the LGPS.

Key pension considerations

• Who is responsible for the deficit funding and how will this affect employer contributions in the future? This can have a significant impact on a company’s viability or leave the council with unfunded costs. Where does the risk best lie? • What is the cost of any pension bond and how is the cost of that likely to be managed? • Who is responsible for any potential pension liabilities that would arise should the company fail? • What form of pension scheme will be offered to any new starters? • Will existing employees continue to be able to be members of the LGPS scheme, and will the JV be able to gain admitted body status to the scheme?

Building a successful joint venture company 15 Setting up the JV

JVs typically require a process to identify and contract with a suitable partner. In our experience, many of the skills associated with partnership working are highly specialised. Most councils will have not been through the process before and quite naturally will not have either sought to develop or retain these procurement, marketing, legal or financial skill sets.

Engaging advisers with these skills processes that may be of use to • If selecting a public-public JV what from the outset is often the solution. councils, including a new competitive are the implications of Teckal as set While we accept that there is a cost to procedure with negotiation and a new out in our ‘Spreading their wings’ this, councils need to ensure that they ‘innovation partnership’ process. They report and joint control on the have the right support to manage the also removed the list of services that procurement? procurement process effectively. (subject to cross-border interest) did • If health, social care, education or not have to be tendered. For many other specific services falling within Selecting the right such services a new ‘light touch’ regime the new light touch regime are part procurement process applies to all contracts above £589,148. of the procurement, can advantage of An alternative model for delivering Light touch services include health the light touch flexibilities be taken? services is usually in response to and social care, education and youth • Could the JV be linked to the challenging funding gaps and time services, and cultural services. So there ultimate pursuit of a public service is limited. Councils feel the pressure will inevitably be a competition, but mission based on employee to move very quickly through the the key is the manner in which tender ownership or participatory procurement stages so that benefits exercises are managed to choose the principles? If so, there is also a can be realised as soon as possible. best partner for a JV. procedure that can be followed As a result, OJEU notices are often Councils need to consider the to deliver this objective produced to a very short timescale. following areas before procurement: Once a shortlist of potential partners is The impact of this can be a lack of • If needs are well understood, established, if the procurement process clarity on councils’ requirements and would a competitive process with allows it, councils are able to enter insufficient time and flexibility in negotiation be appropriate? into discussions with them in order the procurement process to explore • If more innovation and solutions to identify a preferred partner. The fully the opportunities with partners. from the market place are required, process can help to ensure the council In some cases, this has led to the would a competitive dialogue be a gets the best deal, as interested parties procurement process being stopped good idea? may be encouraged by competition which can then cause further delays. • Where would an innovation to enhance their offer – not merely in Procurement processes should partnership fit in? This is still an financial terms, but in the innovation not be viewed as a formality, but as evolving process and may be more and other value reflected in their bids. something capable of delivering a real appropriate for development of new It can be an opportunity for both solution to the actual objective. It is goods, though the legislation does parties to get to know each important to be open to the different state it can also be used for services. other better. processes that could be followed. There is limited evidence as to the The new 2015 public procurement benefits the process can offer but it regulations have introduced new should not be discounted

16 Building a successful joint venture company Case study 2

CATERed

CATERed is a co-operative trading company which is 49% As well as delivering school meals, the company has owned by 67 local schools and 51% by Plymouth City freedom to secure additional business (within the Teckal Council. It serves almost 2.5 million meals to Plymouth thresholds) and procure its own back office support. schoolchildren every year. The council subsidy is reducing each year and the service The council historically subsidised the school meals service will be self-financing by 2016/17. The business plan makes which made a notional loss of around £1 million a year. it clear that CATERed needs to feed 61% of pupils to The schools’ focus was perceived to be on the teaching enable it to make a small surplus that covers the kitchen curriculum rather than the financial viability of delivering maintenance and equipment costs. There are plans to the school meals. The catalyst for change occurred when expand the service to other schools in the region and more central government delegated responsibility for the service widely, but CATERed is very clear that the relationship with to the schools. At this point the council discussed the existing school clients must not be compromised. likely impact of this change with the schools to help them CATERed obtained independent legal advice in setting up develop the best way to meet their statutory responsibility. the company and now recognises the need for further It was clear to all that schools could not afford to deliver advice on VAT and Corporation Tax. the service in the same way and that individually they would be unable to maintain kitchens and the employ the people The council took care to ensure that staff transferring were required. engaged and informed throughout the transition process. Regular communication was seen as key to resolving As a first move, for the financial year 2013/14, all key questions such as job security and pensions before those schools and academies receiving services from rumours started. the education catering service agreed to pool the entire delegated funds, to support each other, share risk and By owning 51% of CATERed, the council has been able to ensure continued provision of high-quality food at the ensure that staff retained their LGPS pension. However, the same cost to all pupils, regardless of where they lived rebranding has had a positive impact on front line staff as or attended school. Schools supported the pooling they now have a wider range of opportunities for business arrangement on the understanding it would ultimately lead development. to the setting up of a company which had a strong schools The council believes that some aspects of the JV’s representation. management will need further development. Performance The council and schools later decided that a JV structure management is one such area. would suit the requirements of joint working; allowing the CATERed took a decision to procure as many back office focus on good outcomes for children in addition to cost services from the council as possible in order to be able saving and income generation opportunities. The company to focus on the core business. However, CATERed is now was set up as a Teckal company in order to enable it to looking more closely at these costs, working with the trade with the council unfettered by procurement rules. council to identify the true cost of service provision, rather The council believes that this collective approach will than an apportionment. It may decide in future to test the “enable head teachers to focus on the core business of market and the council will need to recognise that this providing children with a high-quality education rather than source of income may not continue. wondering whether the peas had been delivered for lunch”. The council considers CATERed to be a success. There is Approximately 250 staff were transferred from the a shared vision of delivering high-quality affordable school council’s education catering service to the company, meals and the number of children taking school meals has meaning their conditions of service, hourly rates, hours increased significantly. This allows the council subsidy to and length of service were unaffected. Decisions about reduce each year. New opportunities for expansion are the school meals service are taken by a co-operative joint carefully considered for strategic fit with the core business partnership board of elected representatives from the of school meal delivery. schools and the council.

Building a successful joint venture company 17 Set the right procurement criteria Correctly structuring the procurement Review objectives Councils will need to be aware of EU process at the outset is extremely Keeping alignment of the objectives procurement requirements and the important in ensuring that the project throughout the procurement process different requirements that may apply is capable of delivering what the for both parties in the JV is essential. when the other party is in the private council needs. Throughout the procurement process rather than the public sector. It is important that councils do not the council and its partner should Selection criteria used to shortlist simply ask the market to provide the constantly revisit the questions “What potential partners are usually based answers without thinking carefully is the JV here for? Will it work for on their financial standing, technical about their requirements first. Relying both sides?”. This consideration is capabilities, competencies, experience, on their greater experience can of often more important when entering attributes and legal status. However, course be beneficial, but must be done into a JV that includes both public and in a JV relationship it is also important with caution. Lack of preparation, private sector partners. that the other party will ‘fit’ well with with an expectation that the market Common council objectives the objectives and vision of the council. will provide the solution, may result include a change in service delivery, This means that other criteria may need in suppliers providing the answer that cost reduction via investment in new to be identified and incorporated into suits them, not the council. technology and improved business the selection process. Councils may also wish to consider processes. Common objectives for The Public Services (Social Value) the reputation of potential partners commercial partners are profit, or to Act 2012 already affords councils and the threat (perceived or real) of gain market share. Understanding greater freedom on responsible potential conflicts of interest. Failures the drivers and key deliverables of procurement and it is increasingly of other JVs often result in a level all parties and aligning them prior to common for councils to pursue forms of suspicion being created before entering into the venture is critical to of commercialisation that also deliver contracts even begin. its long-term success. both a financial and a social return. The intention here is to deliver multiple outcomes from the same spend. Non- financial outcomes could include: • the stimulation of more affordable “In a JV relationship it is also important that the housing other party will ‘fit’ well with the objectives and • supporting local SME jobs and apprenticeships vision of the council.” • paying the Living Wage • safeguarding vulnerable communities • protecting the natural environment.

18 Building a successful joint venture company Make an investment decision public procurement processes and so The partner should bring The JV needs to be attractive to other their expectations should be managed something new parties. There are a number of factors throughout the process to prevent While the process and meeting that will influence the risk assessment them potentially walking away because any procurement requirements is of potential private sector partners. the process is simply too cumbersome important, it is the organisational These include: or costly for them. and governance characteristics of • does the JV offer a good opportunity One of the key challenges for JVs those preferred partners that can be and align with the partner’s own is meeting the aspirations for business critical in establishing a JV which both strategic direction? growth and development. This is delivers its objectives and responds to a • what potential does the service offer particularly important in relation to changing environment. for growth? the potential for securing finance for Is the council clear in what it is • what is the expected timeframe further growth, business development looking for in its partners? What does for returns and the level of return activity and pitching for new business. the council feel it lacks in order to be expected? These are all skill sets which may need commercially viable? Our research • is the investment required at an to be invested in and developed further has shown that councils are often appropriate level? if the company is to be a success. looking for a partner who can help • is there an alignment with the Any tensions between delivering them to transform services. While partner’s aspirations for its wider the existing day-to-day services and price and cost reduction will inevitably business and place in the market? servicing the council while investing be a consideration, the ‘added value’ • is it clear and agreed if any partner time in new business developments or additional innovation that the intends to deliver social as well as need to be understood. Teams may other party brings to the venture, the financial returns? not have had to focus on these areas opportunity to share knowledge and • are the risks worth taking and will in their previous work and so there expertise, is also important in making the board accept this? must be an acknowledgement that staff a difference to the way services are may also need to undertake their own delivered. It may also offer other Throughout the procurement process, personal development plans which are opportunities to the council that may it is important to be mindful that (for supported by the company. not otherwise have been available. both the council and its commercial All parties need to be clear at the Where councils are realistic about partner) this is an investment and outset about what they want to achieve their strengths and weaknesses, critical business decision. The and how they will grow and adapt carrying out a SWOT analysis proposition should not be treated as together, anticipating that the future (strengths, weaknesses, opportunities an outsourcing exercise. The council environment in which the JV works and threats) and being clear about their should also be mindful of the fact will change over time. own capabilities will help to identify that some investors or potential the complementary attributes needed partners may not be familiar with in a partner.

Building a successful joint venture company 19 Share profits and risk Build in flexibility If the JV is a partnership, the It should not be possible for one party It is important that flexibility is built entity is ‘transparent’ for corporation to benefit at the loss of the other. into the partnership arrangements tax purposes. That is, the direct tax For example, excess profit clauses or at the procurement stage within the treatment would revert back to the the requirement to share the costs contract, articles of association and partners in this arrangement, with of redundancy or service reduction performance management mechanisms. each partner accounting for its share of should be built into the agreement. This will allow for significant changes any profits in line with its share of the Transparency is important for trust in external factors, for example, partnership. If the entity is a company to be built between partners and also further Central Government funding limited by shares or guarantee, it will to demonstrate to other stakeholders reductions. The business case should be subject to corporation tax which (such as local residents) that the JV consider the impact of these factors. will require tax return filings for each is operating in the interests of all How will the level of service provision accounting period. partners. The rationale behind all be managed and the balance of risk The nature of the shareholdings charges – such as management charges and control varied? could impact on the use of group and advisory costs – should be clearly Many JVs we have seen fail have or consortium relief to reduce tax articulated so that they are understood done so because of the rigidity of liabilities. Depending on the size of and accepted. A partner who brings contracts. The procurement process the company and the numbers of a significant degree of expertise, and contract should factor in the staff transferred by TUPE into it, infrastructure and/or commercial skill flexibility to be open and upfront intercompany charges and transfer will expect a greater share of the JV about some of the more difficult areas pricing may need to be taken into commensurate with the greater share of commercial negotiation that may account when projecting corporation of the risk they are taking on. This may be required. tax costs. signal to stakeholders that they are The JV may be required to register benefiting more from the JV unless the Ensure you have considered the for VAT where it makes taxable benefits they bring are clearly stated tax implications supplies. Key considerations are the and acknowledged. Councils are, by their nature, tax VAT treatment of the goods or services efficient and so delivering services provided and the ability to recover through a corporate structure the VAT incurred on expenditure used means that tax implications need for making exempt supplies. The JV to be understood at the outset. It is could be entered into a VAT grouping important that specialist advice is arrangement with other non-council “The council wanted a minority sought early on, as it may affect the shareholding entities which could shareholding to facilitate structure or governance arrangements simplify VAT administration and of the JV. This will ensure that tax commerciality, but sufficient possibly reduce ‘sticking VAT’ costs and VAT are managed appropriately whereby VAT cannot be recovered. to ensure that the council’s and reduces the chances of anything In our experience, inappropriate VAT voice was heard.” significant arising that could impact on planning can leave JVs and councils Staffordshire County Council the positive outcomes of a JV. with unexpected costs.

20 Building a successful joint venture company Case study 3

Southwest One

Southwest One (SWO) is a JV set up in October 2007 • While the vision was to transform services for all, between Somerset County Council, Taunton Deane in practice each of the partners specified different Borough Council, Avon and Somerset Police and IBM. requirements, which added to the complexity of what The company is governed by the terms of a Joint Venture needed to be delivered. In hindsight more work should Agreement (JVA), with IBM as the majority shareholder have been undertaken earlier to gain clarity on the core providing financing under the JVA. Each of the public common elements for the partners and an understanding authorities nominates a director at the board and maintains of where flexibility was needed for the individual a shareholder veto on certain ‘reserved matters’. circumstances. This would have reduced the number of competing client priorities SWO provides operational services – including ICT, finance and HR/payroll – to the public authorities – which, along • The arrangement effectively handed over the control of with any associated financial liabilities, are subject to a the transformation agenda to a private sector company. Parent Company Guarantee (PCG) between IBM and each This resulted in difficulties in the way that the client side of the public authorities. of the contract was managed. As so many functions went into the JV the council initially felt that only a small The driving force for the JV was the councils’ desire to do contract-management function was needed. However something fundamentally different with their back office this created tensions when delivery was not as expected services and, in transforming them, to focus on how and further resources were then needed when problems services were delivered to the customer. The vision was arose, and at a time when council resources were to provide services to a wide range of authorities across becoming increasingly squeezed the south west, growing the JV to achieve savings for all • The selected performance indicators were not the most of them. The aims were to: appropriate and not enough thought was given to the • modernise the way the partner organisations worked, to behaviours that these indicators might promote. Greater improve access and delivery to customer facing services focus needed to be given to mature, constructive • improve and reduce the cost of corporate, transactional relationships between the partners, rather than and support services with investment in new technology contractual mechanisms • generate economic development by investing in • The model used worked on a secondment model, Somerset. with staff from the partners being seconded into the company with assured employment. This meant that The lessons learnt have been key in helping the partners there was no opportunity to normalise terms and renegotiate the contract. As a result some of the strategic conditions which has hampered the ability for SWO functions originally placed with the provider have now been to find savings for its partners placed back with the other partners. • The need to be able to flex the contract for changes in The overriding message from this experience is the need circumstances was not properly assessed, particularly for councils to be agile and not expand without the right those outside of the council’s control, such as changes governance. Only enter into a JV if it makes the most to the economy and the financial circumstances of commercial sense. Be clear that the structure will really the partners deliver the benefits that you expect, and that a different The lessons learnt have been important in helping the model of service delivery, either through outsourcing or partners renegotiate the contract. As a result, some of the a local authority trading company, isn’t more appropriate. strategic functions originally placed with the provider have The JV has experienced difficulties including significant now been placed back with the other partners. contract disputes which resulted in an out-of-court The overriding message from this experience is the settlement. This experience has resulted in the council need for councils to be agile and ensure that the right reviewing the JV and learning some important lessons. governance supports future growth. The council’s advice The key challenges can be summarised as follows: is only to enter into a JV if it makes the most commercial • The project was very ambitious. This generated a hugely sense, to be clear that the structure will really deliver the complex contract over 3,000 pages long, making expected benefits, and that a different model of service performance management against the contract a delivery – either through outsourcing or a local authority challenge trading company – may be more appropriate.

Building a successful joint venture company 21 This is sometimes overlooked when JV Dealing with support service costs with the council whether a charge business plans are being developed. Our report ‘Spreading their wings’ based on actual usage was more For employment taxes, the JV will identified that back office support costs appropriate. Agreement has now been need to: run a separate payroll (with were a major issue for the companies. reached taking account of the added separate PAYE and CIS references); The same issues apply to JVs. In the value and knowledge transfer from agree any settlement agreements early stages of a JV’s lifecycle, it is the council alongside the costs for the with HMRC separately from those common to procure support services transactional part of the service. of the council and other partners; from the council. This approach We have seen a trend of more JVs set up independent salary sacrifice enables the company to focus on looking elsewhere to procure back arrangements; and review any tax building its business and provides office services because of cost and implications from changes in terms and income for the council. However, as quality, or deciding to provide these conditions – particularly those arising the company matures, it is important services themselves. These JVs often from TUPE which will apply when to have the freedom to procure develop their own infrastructure staff are transferred from the council to these services from elsewhere, if this to do so. This presents a challenge the new company. represents better value for money. for councils to consider whether The longer-term plans for business In some cases, for example the remaining council services can development are also important CATERed, the company procured as remain sustainable given this loss of considerations at the outset for tax much back office support from the income. Their overheads may remain planning purposes: council as possible in its early stages. unchanged regardless of whether the • Where is growth anticipated and in This was a deliberate decision to allow company purchases back office services what markets? those involved to focus on their key and therefore this may not result in a • Will the proposed structure of the objective of providing quality school saving to the council. This should be JV support these ambitions? meals. As the company matured, assessed and quantified as part of the it challenged the rationale for the business case development. charging mechanism and discussed

“Our report ‘Spreading their wings’ identified that back office support costs were a major issue for the companies.”

22 Building a successful joint venture company Making the JV successful

JVs tend to have a high profile and are more transparent than LATCs due to the contracting terms, invoices being available for scrutiny and the fact that they are subject to many Freedom of Information Act requests. It is therefore essential to continue to work at the partnership once set up until it ends, whether happily or not, and to be mindful that aspects of the transaction and relationship will undoubtedly enter the public domain.

Create a culture of trust Put the right leadership in place reviewed objectives throughout the We have seen that unsuccessful for the JV lifecycle of the JV fared better that JVs have lacked trust between the It is important to put the correct those who did not; all organisations partners. This is often the result of leadership in place and create the change over time and so do their misunderstandings. It is therefore right culture in order to make the objectives. Understanding both parties’ critical to ensure that there is a most of the attributes of the partners goals helps partnership working and culture of trust; something which is and achieve their respective goals. In places less focus on the minutiae of the achieved through getting to know our experience, successful JVs have contract as a means of assessing to what the other organisation and effective appointed individuals onto the board extent the JV is on track. communication. who have knowledge of the business There should be a ‘one team’ ethos and the associated market and an Allow the JV to operate independently between the council and the JV and appreciation of the original motivations The JV must be able to operate outside an understanding of the importance for starting the JV. Bringing in of the council, focusing on income of communication across all commercial expertise is important to growth alongside improved service stakeholders. In our experience, poor help shift the culture towards greater delivery and cost reduction for the communication leads to uncertainty commerciality and set the tone for council. The temptation to make the which is often misinterpreted as a future growth. Our research found that JV another corporate directorate that significant risk. This can be addressed those who have recruited externally acts in the same way as others needs by ensuring that stakeholders are for individuals with specific skills to be resisted. This may be facilitated represented on the board. perform better. through physical separation; originally Time needs to be taken throughout Entrust was based within Staffordshire the life of the partnership to work Focus on the key outcomes County Council’s offices and now together and share experiences and Keeping alignment of the objectives operates from its own premises which concerns. Developing an appropriate for both parties in the JV is essential. If has helped to demonstrate it is a working style will take time and the objectives are income generation, separate commercial entity. requires cultural change by both improved service performance and partners. Councils need to recognise cost reduction, it is important that that their own role as an active scrutiny is held at this level and does collaborative partner – distinct from not fall into an assessment of inputs or an outsourced service arrangement – performance indicators. Our research is fundamental to success. found that those who periodically

Building a successful joint venture company 23 Case study 4

Enterprise Liverpool

In 2002, Liverpool City Council entered into an In 2010 the political administration change in parliament arrangement with Enterprise plc for the provision of and at the council, and austerity measures, were also highways maintenance and street lighting services. A being felt. There was increasing pressure to make financial subsidiary company of Enterprise plc, Enterprise Liverpool savings from awarded contracts. This led to redundancies Limited, was created to carry out the contract. The new and failings in contract performance, and the basic JV was then successful in securing contracts for street services provided by the JV also began to be affected. cleansing (2003), grounds maintenance (2006) and The various contracts secured by Enterprise Liverpool waste and recycling services (from 2008) through OJEU Ltd started to come to an end. The highways and street procurement. lighting contract and street cleansing contracts ended in At the start, a key driver was the opportunity to bring more 2013 and the council moved to a contract arrangement commercial discipline to the service, with a strong focus with another provider. In the same way that the additional on controlling costs. Through negotiation with the staff and services brought into the JV presented the company with their unions, the company’s management made changes to opportunities to share its overhead costs over a wider employment terms and conditions. In turn, this enabled the service base, the contractual changes left the company company to develop a service that was flexible and more with overheads to be allocated across a reduced number responsive to any operational risks that threatened the of services. services being delivered and that might otherwise result The Council has been exploring the best way to deliver in financial penalties through the contracts’ performance these services as the contracts came to an end. It management framework. has opted to bring the remaining services of grounds The JV structure was seen to provide the council with some maintenance and refuse collection into a new local advantages over other delivery vehicles, in the way that it authority trading company. The street cleaning contract provided an opportunity for influence and control: has also since been transferred into the company, from the previous provider. • The council appointed two directors to the company board and holds a 19.9% shareholding with any profits While the original joint venture was set up to save money distributed equally to each partner and to enable the council to reduce its council tax charges, • With this contribution to the board, the council had input the change now is to provide a structure that gives into the appointment of staff, decisions around additional sufficient flexibility to respond to business needs but still contracts and opportunities to vary the company’s with a focus on efficiency and the need to drive through policies, and certain matters required mutual agreement performance improvements. • Major investment required the council’s approval • The company’s business plan was the mechanism to tighten up performance every year. With the cash contribution effectively frozen, the onus was on the company to make the necessary savings to offset inflation, which also helped the council avoid inflationary cost pressures

24 Building a successful joint venture company Ensure appropriate corporate Get the right level of performance CATERed’s KPIs is a cost comparison structure and governance management not only with other local authorities’ arrangements Councils will need to think clearly school catering services but also with The JV’s corporate structures should about the KPIs they want to measure commercial entities in this sector allow it to operate in a commercial and how these link to the objectives. providing the same service. manner with non-partners and The KPIs will inevitably drive the While measuring progress and in a partnership manner with the behaviour and priorities of the JV, achievement is important, care must council. From a council’s point of so they need to be closely aligned be taken to ensure that KPIs are not view it should have the necessary with what it aims to achieve. As the used to the detriment of the JV, as a oversight and arrangements in place to market moves to more incentivised focus on contract management rather identify risks in the JV and to ensure and outcomes-based contracts, this than partnership working can be performance remains high, but without may require another cultural shift disadvantageous overall. Councils having to revert to the contract. If the and realignment that will need to be must therefore strike the right balance governance is strong, the operations of carefully navigated. between contract management through the JV should be able to run smoothly KPIs and working collaboratively to without interference from the council. “Having a mature relationship achieve objectives. A further risk of Some councils commented that with all concerned is much more relying on KPIs is that the council operating a ‘tight and loose’ model, important than a highly complex becomes too closely involved in the whereby the governance is tight but the operational aspects of the JV (rather contract arrangement.” operational side is loose, benefits the than strategic) which can hamper its Southwest One JV because the council can allow the ability to thrive commercially. day-to-day running to be the remit of Our case studies identified a wide the JV’s management. range of performance management Take into consideration the regimes. Southwest One has a hugely local politics complex contract which comprises over Changes in local political 3,000 pages. This makes performance administration might be expected management of the contract a real over the life of the JV which means challenge. One of the main challenges that the appetite to retain it may faced by Southwest One was that the change. Councils should therefore three public sector partners all wanted consider the impact of these changes different service provision and KPIs on the proposed JV. For example, a adding significant complexity. It also venture that was heavily dependent meant that economies of scale were on government grants may find difficult to achieve. that a change in funding priorities In contrast, CATERed has a would have a detrimental impact on comparatively under-developed its viability. These aspects should be performance management framework. identified as part of the business case, The main indicator used is the take-up but again underline how crucial it is to of school meals. The council took ensure that the objectives are the right external advice on KPIs when setting ones for the project. up the company. As a result, one of

Building a successful joint venture company 25 Planning the exit arrangement and be returned to issues such as the approach to be taken It is helpful to have some clarity from each partner. on asset valuations and ownership. the outset regarding how and under The initial contract with the JV The shareholders agreement would what circumstances the venture will may have been for a fixed period of normally detail how the parties can come to end and that this exit strategy time and these contracts may then be exit from the JV and this would also is documented, even if it is amended at extended or re-tendered. If the council accord with provisions and protections a later date. The Articles of Association seeks an alternative provider, the JV contained within the Articles of and Shareholder Agreement can is faced with a shrinking business, Association. For instance, the articles include protection for all parties. but may be left with limited scope to may include protections around For example, a ‘tag along provision’ reduce its overheads or other costs reserved matters which cannot be is a right entitling certain (usually while having to continue to meet agreed without both parties’ consent, minority) shareholders to participate other service obligations. If short- rights of pre-emption so as to avoid in a sale by the other (usually majority) term thinking becomes the norm dilution of existing shareholdings, or shareholders at the same time and at then this may hamper investment that provisions which can force share sales the same price for each share. ‘Drag might otherwise improve business or transfers in particular scenarios along’ provisions can equally enforce practices and release efficiencies. It where one of the parties’ intends to sales by the other party. is therefore vital for the council and sell their shares. It is imperative that During the lifetime of the JV, it is partner to agree how and under what all parties are clear on the potential important to try to resolve disputes circumstances the JV might be brought exit strategies and how they may be without resorting to formal procedures to a close, so that action may be taken implemented, so as to avoid disputes or terminating contracts. Building swiftly if needed. arising at a later stage, particularly rapport and regular communication, The exit strategy not only needs at a time when good relations may even when the project is running to be considered in relation to be more strained. smoothly, can help to ensure that terminating the services agreement, A JV has reached its end when if problems do arise the goodwill but also in relation to the governance it can no longer provide the most has been established to keep the arrangements, sale/transfer of shares effective vehicle for ongoing council relationship as positive as possible. As in the JV company and, ultimately services to be delivered, or where a JV is a less ‘arm’s length’ relationship winding it up. The complexities arising in contrast it has been successful in than traditional outsourcing, building on the transition of services, depending meeting its objectives and reached the trust and the ability to work together upon their nature and scale, cannot be outcome that it was set up to deliver. are key. Personalities and working underestimated. A properly managed Whatever the result, the experience relationships are important. exit could take some time to realise. will inevitably impact upon future At some stage, however, the JV There should be consistency across collaborations. The ending of a JV does may need to end. Its objectives may the legal documentation as to how any not necessarily mean that it has been have been met, or the council may exit or termination strategy is to be a failure; rather that it has served its decide to bring it back in house. For implemented. The services contract purpose and the council is now able to both scenarios, the exit strategy must would usually contain ‘consequences deliver services better through another be understood by all parties at the of termination’ provisions and an exit model, or bring it back in-house if that outset of the establishment of the JV, management plan to ensure that there is the best option. especially how the risks and rewards is a managed process for the transfer will crystallise at the end of the of the services/exit. This may address

26 Building a successful joint venture company Case study 5

Coventry City Council and Solihull MBC Waste Partnership

The Coventry and Solihull Waste Disposal Company Limited • Using professional advice whenever needed by company (CSWDC) is an independent waste management company executives. The councils themselves have also sought advice whose main business is extracting energy (heat and electrical where necessary to support their role as shareholders power) from municipal and commercial solid waste through an • Keeping the governance as simple as possible energy-from-waste facility based in Coventry. CSWDC manages • Having a gateway process in place to ensure decisions are household waste disposal for the councils and also provides made as robustly as possible and against agreed performance heat to Coventry’s district heating network through a council criteria partnership with Cofely to heat council buildings and the cathedral. • Ensuring the company continues to generate value for the shareholders CSWDC has been operating successfully since 1975, but was established in 1992 as a local authority waste disposal company (LAWDC) because Coventry and Solihull were obliged to arrange Advice for others considering entering a JV for the discharge of their waste disposal functions through a • Don’t rush when developing the model – take a measured pace contractor or a LAWDC. to ensure nothing is missed, get the right advice early enough and learn from others Coventry holds two thirds of the share capital and Solihull has the • Keep everything as simple as possible to make it easier to remaining third; voting rights are shared equally. Both councils manage – a clear purpose is easier to achieve have maintained a strong, positive relationship over the duration of the venture. Warwickshire County Council recently gained a • Some service areas are easier to put into a JV than others minor limited rights shareholding at nil value. The company is – waste is relatively straightforward, but is also highly managed operationally by a managing director, financial director, specialised, so ensure that there is the right expertise to a small management team and technical staff. They report to the operate the venture and as part of the board board. Both councils have non-executive directors on the board • Create the right environment for maintaining the alignment and there is also an independent non-executive director. The of strategic objectives and exploring how the venture can shareholder panel has the right to make certain decisions which maximise benefits to all parties are incorporated in the Articles of Association and Shareholder • Question whether a formal structure such as a JV is necessary agreement – the panel includes elected member representatives – an informal financing arrangement may be preferable, from each of the councils. particularly for shorter-term projects, and enable the council to be more agile in response to opportunities for investment Key success factors • Put in place strong governance arrangements which people • Clarity on the purpose of the company and keeping strategic understand and believe in, with a framework including a clear objectives aligned – the councils each had a shared objective shareholder agreement in place, which is refreshed regularly to collaborate to maintain relevance • Throughout the duration of the partnership time has been • Consideration of whether critical size is an issue in sectors invested in familiarisation with the other partner that are dominated by larger entities, often multinationals • Strong governance through the board – ensuring effective challenge and performance of the company and its business Challenges experienced include: plans to ensure they remain robust. This has also included • Implications of managing the pension liability and associated ensuring that non-executive director appointments are made contribution rates within a smaller entity, for staff who are part on the basis of strong credentials and experience of the LGPS • Maintaining strategic awareness of the company’s activities • Cost of existing terms and conditions and losing competitive and its operation, in the interests of both the company and the edge in the market place shareholders • The complexities of tax planning which has usually required • Having no day-to-day input from the councils to allow it to specialised advice operate with sufficient commercial freedom as an independent • Breakdown in relationships throughout the lifetime of the entity partnership and the rebuilding of them

Building a successful joint venture company 27 Case study 6

Nottinghamshire County Council JV with CORMAC

The council was looking for an alternative way of delivering its Staff are supportive of the change, they understand the highways services. An options appraisal was conducted and alternatives and welcome this as an opportunity to develop and the authority selected a joint venture model as the best fit to grow, as CORMAC has done over the past few years. its ethos and goals. This would enable the council to benefit Potential issues around the Local Government Pension Scheme from the skills and scale economies of a partner. A partner and working capital have been addressed. The agreement will with shared values was also important, keeping the beneficial operate on a positive cash basis – the council will pay monthly elements of a public sector ethos but adding a much stronger in advance to an agreed profile. Via will have a positive cash commercial drive. Budgetary pressures meant that maintaining flow. Sub-contractors will be paid promptly. Client management, a viable operation was becoming more challenging. Generating as in all such arrangements, is key to ensure that the work is more external work was not only desirable, but necessary, with undertaken to time, cost and quality standards, and invoiced surpluses returning back to the council. appropriately. Elected members will still play a major part in For CORMAC, this was the first JV model they had entered into monitoring performance and determining key priorities, in terms with a local authority to deliver its services. They were looking of capital investment. to build on their original model and were keen to explore the Support services have also been considered. A new company, possibilities. CORMAC was keen to expand into other parts of the CORSERV, has been set up, owned by Cornwall Council. This is country and the Midlands was seen as a good opportunity. The the holding company for Via. CORSERV will provide a range of joint venture model was an attractive option for both partners: services to Via, including Finance, HR, Health and Safety and NCC would pass over some control but gain expertise and scale commercial support. Payroll and IT will continue to be provided from an organisation that shared similar values; CORMAC would by Nottinghamshire CC. CORSERV will also provide support expand its business and would share in the benefits. services to other companies owned by Cornwall Council. The contracts were signed on 20 May and the new company Nottinghamshire County Council will own 49% of Via and ‘Via’ has a go live date of 1 July 16. The budget of £42m CORSERV 51%. The board will comprise two directors from (including capital and revenue) will be transferred, covering CORSERV and two from Nottinghamshire. The chair is from highways operations, highways management and design and CORSERV and will have the casting vote. Via will be run from fleet management and maintenance. Initially the JV will largely Nottinghamshire by the new Managing Director, Doug Coutts, be handling passported work, and it will very much be business who has extensive commercial highways experience and there as usual to start with but after settling down the plan is to is the benefit of a successful and strong management and staff start looking for more external business in both the design team from the current operation. and delivery areas. CORMAC has tried and tested processes, including a time recording system that will allow them to record productivity, helping to control costs and making the operation more commercial. The main barrier to change is culture, but the council and CORMAC have worked to ensure that this is not an issue by having a good communications plan including staff engagement and briefings. Both parties recognise how important it is to bring staff along, for them to be involved in the journey and feel that they have some control and input into the change process.

28 Building a successful joint venture company About us

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Building a successful joint venture company 29 Contact us

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