Joint ventures: Are we better together?
Source: PSE - April/ May 16
Vivien Holland, local government advisory director at Grant Thornton UK LLP, examines the potential of Joint Ventures for local authorities going forward.
Local government is continuing to innovate and change as it looks for ways to protect frontline services. The changes are picking up pace as more local government bodies innovate by introducing alternative delivery models. While these new models are not a solution by themselves, they do add to the wider solutions being explored by councils such as devolution, collaboration and integration.
We have been monitoring progress of alternative delivery models with interest and reporting our findings in a thought leadership series, which began with our report ‘Responding to the Challenge’ examining how councils were looking at a variety of models to tackle the financial challenges.
Next came ‘Spreading their Wings: Building a Successful Local Authority Trading Company’ published in April 2015, which focused on the use of wholly-owned trading companies given their increase in popularity. A key advantage of a wholly-owned company is that the council is the sole shareholder and is able to retain any profits made, but it also must take all of the risk.
The latest report in the series, which will be published in spring this year, considers Joint Ventures (JVs).
JVs offer local authorities the opportunity to share the risk albeit with a lower share of the return. Partners in JVs typically bring capacity, expertise and investment, enabling a more commercial approach, but they need to be chosen with care.
The experience of local government in relation to JVs has been mixed, with failures arising particularly where they have focused on the contractual aspects of the relationship rather than working together in partnership. This is more evident in cases where councils have partnered with a private sector provider.
However, there is an emerging breed of JVs within the public sector in which councils partner with commercial companies that are themselves wholly-owned by councils. Their commerciality combined with public sector ethos makes them a viable option compared to the more traditional public-private partnerships.
Our research has identified some key learning from JVs past and present. These include:
- Be clear on your objectives for setting up a JV such as income growth, cost savings and value to the community. If all you want to do is deliver savings, outsourcing may be better.
- Take time in the procurement process. You need to be confident that the procurement process is capable of delivering the right JV partner who shares your values but also has the capacity to deliver.
- Create a culture of trust and strong working relationships. There should be a ‘one team’ ethos between the council and the JV, and an understanding of the importance of communication across all stakeholders. In our experience, silences are filled with questions and uncertainties misinterpreted as significant risks.
- Share profits and risk. It should not be possible for one party to benefit at the loss of the other partner.
- Anticipate the changing environment in which the JV will operate throughout its lifetime, both operationally and politically. Put in place mechanisms to address future tensions, not just formal dispute processes but also regular meetings and guiding principles for how to expect to manage the relationship which will allow it to evolve and eventually exit.
- Allow the JV to operate independently. The JV must be able to operate outside of the council focusing on income growth alongside improved service delivery and cost-reduction for the council. The temptation to make the JV another corporate directorate that acts in the same way as others needs to be resisted.
Treading the line between contract management and partnership working may be challenging, and is the reason for past JV failures, but the selection of a partner and the building of trust is key to success.
Our research has found that in many cases councils believe that they work better in a commercial setting when working in partnership, rather than operating alone. As one observer noted “it is better to have 50% of something rather than 100% of nothing”.
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