Alternative Service Delivery Models – Asset Financing

Monday 23 May 2016   Category: Leasing By Stephen Kelly

Most local authorities no longer rely solely on ‘in-house’ operations to deliver either public services or their own internal functions. Below we cover some of the alternative approaches being used by local authorities and highlights some of the implications for asset financing issues and related risks. Alternative service delivery models (ADMs) include the use of ‘shared services’ between multiple local authorities and also between local authorities and other public bodies; joint ventures (JVs); outsourcing to private or voluntary providers; and also ‘insourcing’ where previously outsourced services are brought back ‘in-house’. ADM’s also involve the increasing use of Local Authority Trading Companies (LATCs) to trade for profit, providing a revenue stream for Local Authorities.

Local authorities have always had the legal power to make use of different forms of service delivery. Up to the mid-1980s, local authorities provided most of their services ‘in-house’ with their own departments. Following the introduction of compulsory competitive tendering in the Local Government Act 1988, authorities were legally required to open many of their services to competitive tender. This requirement was replaced by the ‘Best Value’ regime under the Local Government Act 1999, after which many forms of alternative service models have continued to develop. Reductions to local government funding over the last five years has challenged local authorities to experiment with alternative forms of service delivery, seek to reduce overheads, and explore new ways to raise revenue.

ADMs typically involve the establishment of trading companies (LATCs/Teckal), trusts and spin-offs including mutuals.

The ‘Teckal exemption’

European Union public sector procurement rules require a competitive tendering process for any contract above certain thresholds. It has now been included in the Public Contracts Regulations 2015 that contracts by public bodies may be exempt from this requirement if the contract is awarded to a subsidiary body which only exists to provide services to the local authority or authorities that control the company. This is known as the ‘Teckal exemption’ (from the legal case Teckal Srl v Comune di Viano in 1999) and Local Authority Trading Companies are sometimes referred to as Teckal companies.

Implications for Asset Financing

Use of ADM’s will often involve the procurement of new assets and the transfer of existing assets into the new LATC/Teckal company, JV, Trust or Mutual organisation. Moreover, some of the assets may already be subject to existing leasing and/or other derivatives of asset financing either held by the Local Authority or the new partner organisation. Where services are fully outsourced to a private contractor then the assets may well be financed through the contractor with implications for credit and contract performance risk issues, including potentially high debt financing costs. Under fully outsourced contracts and managed service contracts there is often a lack of transparency regarding legal ownership and the cost of financing the assets used to deliver services.

Conclusion

The strategic commissioning of ADMs will have implications for asset legal ownership and the movement, transfer, procurement and financing of assets. There are also contractual risks when transferring existing leased assets across to newly formed ADMs with related credit and financing issues to consider.

Arlingclose’s leasing and asset financing advisory service has experience with helping clients to manage and reduce asset financing risks when setting up ADM’s, including business planning, funding options appraisal analysis, new asset financing procurement and lease contract reviews. For further details please contact Stephen Kelly or Greg Readings.

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