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Joint ventures on the rise?

Source: Public Sector Executive Dec/Jan 2015

Mark Johnson, head of public services at specialist law firm Geldards LLP, discusses the governance, accountability and practicalities of joint ventures involving public sector organisations.

Joint ventures are emerging as a popular way for local authorities to deliver services while responding to tough budget cuts. Recently the London Borough of Barnet announced two new joint ventures with Capita plc, for regulatory services and customer support services, respectively. Regional Enterprise is a new joint venture company bringing together 240 staff from planning, building control, highways, environmental health, licensing and land charges. Awarded a 10-year contract by Barnet Council, the JV aims to reduce costs for Barnet by £5.3m over the contract, while generating £34m in external income.

Ingredients for a successful joint venture

A JV is ‘an arrangement between two or more parties who pool their resources and collaborate in carrying on a business activity with a shared vision and a view to mutual profit’. In the context of public services, we find several key ingredients. There is a contribution of resources, assets and skills from both parties. Public bodies must consider carefully the terms on which they make their staff and assets (land, equipment, brand, intellectual property rights etc) available to the new venture. Does the authority have the necessary powers and consents to set up the arrangements? Specific protections apply to the workforce under TUPE (the Transfer of Undertakings – Protection of Employment regulations) and the Cabinet Office Statement of Practice.

The JV is usually about starting a new business, which must have a clear business plan, identifying risks, and the demand for services or products to be supplied. Is there a wider market beyond the host area that can be exploited to generate more revenue?

In most cases, the JV involves establishing a new limited company in which the public authority and the private or third sector partner each take a stake. The terms of the joint venture agreement are very important. Areas to consider are the agreed strategy and business plan, relative shareholdings and capital contributions, policies on reinvestment of profits vs distribution, decisions on which unanimity is required vs decisions taken by majority and, crucially, the exit provisions if things don’t go to plan or if one party wants to sell its stake.

Some authorities with long-standing JVs have found it difficult to extricate themselves from arrangements that are no longer fit for purpose or perceived as too expensive. For example, Liverpool City Council’s JV with BT plc is ending after reports that BT would not agree to cutting the cost of the £70m-a-year deal any further than the £5m a year over three years they had negotiated.

There must be genuine joint working around a shared vision. Many JVs come unstuck because the partners have not invested enough time initially in considering explicitly both parties’ objectives. The public authority may wish to achieve a step change in affordable service provision by levering in new investment, technology and improved business processes; the private sector partner may desire a defined level of profit and to use the contract as a springboard to capture more market share. A good JV has an appropriate balance of shared risks and rewards. The public authority should negotiate an appropriate share of future rewards, but must also expect to shoulder some of the risks of making the business successful.

JVs are useful vehicles to combine resources and skills, to secure greater market power or better access to markets. A new corporate entity can help to ring-fence more risky trading activities, or develop a distinct brand or business culture outside the strictures of the host authority (such as borrowing controls, pay scales and corporate overheads).

Other benefits

Partnering with an outside organisation may bring access to new technology, lean business processes and technical knowhow. Kent County Council is currently exploring a JV model for its legal services function. Having developed a successful in-house trading unit, the next logical step has been to seek an external partner who can bring investment in new case management systems, marketing and business development techniques to achieve greater reach in public sector legal markets, beyond simply servicing the host authority.

For a public authority, a JV in which they hold a shareholding provides an opportunity for ‘value capture’ – as the business takes off, their shareholding should increase in value. The shareholding and directors on the board provide a ‘seat at the table’, visibility and transparency on the money flows and activities of the business: areas of obscurity frequently criticised in more traditional outsourcing and PFI arrangements.

Authorities must think carefully about governance and accountability arrangements. There is still an expectation from the public and media that senior officers and politicians should be accountable for services.

They must have appropriate mechanisms to monitor the JV’s performance and risks. Structured correctly, around a true shared goal, JVs can be very effective ways for authorities to leverage investment and new skills to transform infrastructure and service delivery.

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