Spinning-out was a centrepiece of the Government’s 2011 Open Public Services white paper, but so far public service entrepreneurs have yet to break free. We think now is the time.
In the face of pressures caused primarily by public spending cuts and an aging population, spinning-out a competitive local government service line – to create a new venture, for public or private ownership – can be a way for innovative local authorities to raise new revenue, cut costs and improve the quality of their services.
The local authority that spins out a service can create a new revenue stream, while those that buy from the new spin-out stand to secure a better deal for the taxpayer by gaining access to higher performing services at lower costs.
Is spiining-out about to take off in local government? In order to help local authorities move aspirations into reality, we have produced a Guide to Local Government Spin-Outs, laying out the spin-out process and offering practical steps for exploring and creating alternative delivery models.
The first question is of course what to spin-out: services must be particularly competitive to incentivise other local authorities to replace their own.
Successful spin-outs have been in the fields of adult social care, leisure and education – areas where the main component is staff, not assets, which provides for a more straightforward process.
As for what to spin-out into: a range of local authority services could benefit from being spun-out into different vehicles, such as joint ventures, companies owned by a local authority or those privately held.
Although mutuals have been the delivery model in the spotlight, they are not actually universally appropriate. Various factors determine the optimal structure, from the nature of the services to the size and scale of the operation and its margins. The competitive environment, future funding requirements and whether assets are involved are also key. The spin-out process itself is similar, regardless of the vehicle selected.
We advocate using a two-stage approach with an interim ‘incubator vehicle’ – a Local Authority Trading Company (LATCO) – run on commercial terms, but under the protective umbrella of the local authority.
By testing and amending the spin-out’s business model in the incubation stage the chances of achieving a fully independent NewCo are maximised. It helps to avoid companies being fully spun-out prematurely, ensuring they are healthy and well-formed before they go to market for funding, which maximises the upside for the local authority.
Specific incubation objectives include determining the optimal bundle of services, establishing a competitive and profitable commercial model and developing a financial history, so facilities such as banking and office space can be secured and investors can assess the opportunity. It can also allow the local authority to provide infrastructure support including premises, IT and HR services at a pro bono or discounted rate.
Finally comes the set-free stage, when the local authority can spin-out the LATCO into an independent enterprise, with the incubation period’s goals achieved. Objectives might be securing capital investment or broadening the customer base to other organisations.
Of course, there are exceptions to every rule, with instances when a one stage process works. This is often when significant scale is involved, for example last year’s spin out of Staffordshire’s education services into a joint venture with Capita, on which KPMG advised.
It is a brave decision to set a service free and the local government spin-out revolution has yet to launch in earnest, but we are convinced spin-out ventures have a role to play as innovation in local services increasingly dominates the agenda in local government. n
Kru Desai is head of local and regional government at KPMG.
