Commercialisation: Risks and challenges
Pubished 31st July 2019
The squeeze on government funding has forced councils to explore new and innovative ways to maximise revenue within their districts, in order to protect the instrumental public services provided to its local communities. As a result, local authorities are shifting their strategy to a more commercial approach, utilising assets more efficiently and selling services in order to generate monies. However, commercialisation is often a complex process, with authorities required to weave through a number of challenges and risks.
One of the main challenges local authorities face in implementing a commercial approach is that local authority leaders lack the experience and support to fully embrace this methodology. This is evidenced in a report by Civica that states only 4% of public sector CEOs and CFOs have the commercial experience to implement such tasks.
The report, published in partnership with the Chartered Institute of Public Finance & Accountancy (CIPFA) further found that 56% of local leaders had concerns over the risks posed by commercialisation, whilst 40% believed a restrictive public sector culture would stagnate any progress.
Pressure on local authorities to do more with less has led innovative councils to take further risks in order to navigate towards a more commercial approach. One method which is currently being implemented by authorities is the investment in commercial property, often funded by borrowing, putting public funds against a high-level of financial risk.
Local authorities must contemplate the long-term sustainability issues that arise from these loans and the risk of becoming too dependent on commercialisation, or taking out too much debt. The CIPFA’s Prudential Code aims to alleviate these risks through guidelines stating local authorities mustn’t borrow in advance of their requirements, purely for a profit purpose.
Local authorities must therefore provide evidence of value for money and the security of the investment. Whilst this is only one example of commercialisation, it is clear huge risks are being undertaken by councils who face pressures and challenges from all sides.
However, with uncertainty with Brexit and further cuts, Britain is under increased pressures and local councils have little option, but to develop new and innovative revenue streams in level with demand.