Over the last several years the popularity of outsourcing within the public sector has fallen, largely due to the failure of high profile providers such as Carillion. This has combined with the squeeze on government budgets caused by the era of austerity to create an environment where local councils have been forced to look for alternative ways of providing services that are cheaper and more secure. One option that has seen a significant rise in utilisation has been the Local Authority Trading Company or LATCO.
Given that falling council budgets were a key motivator in this increase in the use of LATCOs it is important to consider what access they may have to external methods of funding.
LATCOs fall into three broad categories; wholly owned companies, joint ventures, and social enterprises.
Wholly owned companies and joint ventures are LATCOs where the local council retains direct control of the company and will share in the financial risks and rewards of ownership. Because of this they are largely unable to obtain external finance because most banks and other finance providers are restricted or highly reluctant to fund what is essentially a public body.
This leaves social enterprises as the main practical structure through which a LATCO can obtain external funding. A common model for this is a Community Interest Company or CIC.
The principal source of funding available to CICs (and indeed any social enterprise LATCO) is grant funding and donations. In this manner CICs have a lot in common with charities because their goals are not profit focused. There is therefore an incentive for funding bodies and private individuals to support them where they agree with the CIC’s particular cause.
A CIC can also, in theory, access any type of funding that a normal company can access. For instance debt financing through a high street bank, private equity firm, or social investor. Where the CIC is not limited by guarantee, it can also employ equity financing in the form of a standard share issue, or through the use of preference shares.
The practical restriction on such external finance is the ‘Asset Lock’ which is a mechanism inherent to CICs that is designed to ensure that its assets are used for the benefit of the community. This limits the maximum return that can be received by equity investors and will make it more difficult to attract such funds unless the investor has a social motivation. However the Asset Lock does not limit the use of debt financing, as long as it can be demonstrated that the relevant interest rate has been set at a normal commercial level.
Generally speaking social enterprise LATCOs have not been as popular in recent years as their wholly owned company and joint venture counterparts. This is probably because, as stated above, the latter enable public bodies to share in the rewards of more profitable ventures. Nevertheless the former should still be considered a good option, especially where external funding is a key requirement and/or where profitability is low or not a concern.
For further advice on how LATCOs can access external financing, please contact the Ensors Corporate Finance team.