It’s easy to look at the experiences of councils that hit the headlines over failures with companies they’ve set up and take the view that these councils have made egregious mistakes that your own would never do.

But the councils that run into publicised problems have usually spent years ignoring concerns – so confidence isn’t always correlated with success!

And I can promise you that there are local authority companies operating today whose performance and prospects are as worrying as those we all know about – they just haven’t reached the tipping point that triggers media coverage.

Sometimes this is a matter of luck: two projects might have comparable aggregated risk exposures one month, and one month later the specific variables affecting company A mean it has run into serious trouble, whereas company B hasn’t.

So what can you do to get a better understanding of the underlying health of companies in your council, and equip yourself to strengthen them if needed, reducing the risk of serious problems in the future?

Here are 6 warning signs to look out for.

1 – No-one can explain satisfactorily why having the company is better than an in-house team

Many councils set LATCos up when there was a trend for doing this.

Often, an enthusiastic sponsor (a senior manager or portfolio holder) commissioned external advice that presented a case for setting up a company, with optimistic forecasts of additional income being earned by adding some commercial work to the service team.

But reality meant that work from private firms or individuals was hard to win at competitive prices, meaning that the service was essentially unchanged.

If the senior people responsible for your LATCo can’t show you compelling evidence that the council and/or residents and businesses benefit from the LATCo’s commercial status, it’s time to review your options.

2 – The original rationale now looks weak

If you review the reports and slide decks that were used to gain support for the proposal to set up your LATCo, do they clearly set out specific, tangible outcomes and benefits?

Is the causal chain that connects these outcomes to the existence of the LATCo compellingly described?

Or do these documents rely on intangible and vague hopes about energised teams, the impact of commercial management and optimistic forecasts of revenue growth?

3 – Where is the off-ramp?

Councils set LATCos up in an optimistic frame of mind.

And, just as with commercial contracts, it’s rare to find examples where negative scenarios have been carefully thought through and provisions made to cater for them happening in real life.

It seems incredible that we can live in a world of such fast-paced change and yet in our professional lives sign off business cases that make assumptions about key factors like inflation or interest rates well into the future – without building in the capability to adjust or even exit if those factors change substantially.

But it happens all the time in local government!

Does your LATCo have governance and contractual provisions that give it the chance to adjust its course when its operating environment changes?

Can its management team show you how it periodically scans for changes and risks like this and prepares for them crystallising?

4 – Are we equipped to run and oversee our LATCo?

Some LATCos have simple businesses to deliver (ironically, this usually applies to LATCos that are essentially re-badged in-house teams).

But many councils have established joint ventures or enterprises that take them into territory they’re essentially unfamiliar with.

Housebuilding, for example.

In some cases, such companies were set up with chief officers moving into their executive positions. And with portfolio holders being rebadged as non-executive directors on their boards.

But a service director doesn’t become a capable development director just by being given more pay and a new job title.

Nor does a ward councillor become a skilled, independent non-executive director just by being given the label.

These are issues on the company side of the equation.

But on the council’s side, it’s even more common to find arrangements that essentially make it probable that problems won’t be noticed early enough.

How have you ensured that the executive who acts as your council’s shareholder representative (however you label this role) is equipped with the knowledge and skills to appraise the company’s performance and prospects?

More insidiously, can you be sure that your culture doesn’t facilitate the serving up of good news over accurate news?

Are you relying on a finance lead to provide assurance on the company’s financial performance whose only experience has been in local government? How do they analyse cashflow forecasts, overhead ratios and operating margin and assess the firm’s cost and use of capital?

How often are truly independent experts from the business sector your LATCo operates in commissioned to audit your LATCo’s performance and prospects?

And when did your governance team most recently confirm to you that your council’s Standing Orders, Financial Standing Orders and officer/member delegations were reviewed to ensure that they dovetailed appropriately with your LATCos processes for specifying the cash and support services they need from your council?

5 – Is there evidence of change blindness?

“Change blindness is a perceptual phenomenon that occurs when a change in a visual stimulus is introduced and the observer does not notice it. For example, observers often fail to notice major differences introduced into an image while it flickers off and on again.” Wikipedia

When you review the objectives and forecasts that were used to make the case for setting up the LATCo and compare these with the outcomes it actually achieves or has delivered, can you see evidence that expectations have been managed down over time?

I have seen councils startled to discover that the project they set up to build X of something in fact only built X-N – but at a higher cost and over a longer period – and even more startled to realise that they signed this off in a series of decision events each of which made sense to them at the time, but which did not expressly draw their attention to the fact that they were accepting reduced outcomes compared to their baseline plan.

6 – Has your LATCo overstayed its welcome?

It’s surprisingly common to find companies that were set up as part of a project still in existence years after the project was completed.

This often happens in regeneration programmes.

A special purpose vehicle (SPV) is set up to ring fence costs, income and risks and own a building. The building is built and leaseholders found. The SPV keeps going – meaning the risks stay on the council’s balance sheet.

OK when interest rates are historically low…

…and then impossible to exit from without crystallising a loss when this changes.

It’s another example of commercial exit planning simply not being something that most local government officers have been educated about.

Do all your companies benefit operationally because they’re owned by the council? Or could the shareholding now safely be transitioned into the private or third sector?

6 signs that your local authority trading company may be storing up problems

It’s easy to look at the experiences of councils that hit the headlines over failures with

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