No need to axe the specialists

Public-sector finance: soon councils could be selling services to each other, says Paul Gosling

A competitive market in which local authorities sell services to each other, bring down costs and improve efficiency may have been set in train by the Government. Some of the new unitary authorities in Wales, which begin operation in April, say they intend to use a relaxation in controls on municipal trading to win contracts from neighbouring councils.

For many years local authorities have been restricted in their ability to trade with each other by a very narrow interpretation of the Goods and Services Act of 1970 from the Audit Commission, which told district auditors that councils could not take on extra staff to provide services to other authorities, and that if they did so they were potentially acting ultra vires.

Last month, the Department of the Environment circulated an alternative legal opinion, which concluded that authorities do have the power to trade outside their areas with other public bodies, to make a profit from those activities, and to take on staff to achieve that. The DoE's counsel, Stephen Richards, makes clear that he is not arguing that authorities have a general charter to engage in trading. Authorities will be reluctant to act on the new DoE advice until the Audit Commission discloses in a few weeks' time whether it accepts this opinion.

The timing of the DoE's circular is regarded by the local authority associations as significant. The opinion was given in February last year and clarified in June, but distributed only six months later. The associations believe this suggests that the DoE's motives are primarily to do with planning for unitary authorities rather than to assist direct service organisations (DSOs) to become more efficient and win more contracts.

Intense lobbying by Welsh district councils led to the regulations for the creation of new unitaries in the province, in the Local Government (Wales) Act, 1994, to specify that councils would be able to trade with each other. "We made it very clear that to protect specialisms, and to keep them in local government as a whole, local authorities would need the ability to trade with each other, and we pressed very hard for that in the legislative process," says Paul Griffiths, assistant secretary of the Council of Welsh Districts.

The service plans for Wales's new unitaries indicate that many intend to use that opportunity. There will be eight soil laboratories maintained, whose services will be bought in by neighbouring authorities. Disbanded counties' specialised council services, such as education for people with disabilities and various social services, will be retained within some districts, the services to be purchased by other unitaries.

Leon Gibson, chief executive of the new Ynys Mon (Anglesey) unitary council, says that his authority will be entering into new voluntary joint arrangements to trade. It will also go out to win work from other authorities, even in those councils that want to award contracts in-house. "There was a great danger of losing specialisms, we did not want to disaggregate them," says Mr Gibson. "This way we will be saving money and retaining specialisms."

Ynys Mon and neighbouring Caernarfonshire and Merionethshire council have set up a company as a joint enterprise, to provide educational support to schools in both areas, and to sell bilingual teaching support to other authorities.

The Association of County Councils feels it has been belatedly vindicated on two points. County solicitors had argued all along (as had most local authority lawyers) that councils had the powers to trade for profit, and the association had also said that small unitaries would have to create joint boards and inter-trading arrangements if services were to be maintained.

"In a few years we will have Avon re-created, by Bristol working for all the other authorities in the area," predicts Roy Williams, the ACC's assistant secretary, policy.

The relaxation of controls has been welcomed by the Association of Metropolitan Authorities, though it would like to see councils co-operate, not compete. "We would not agree with predatory cross-border tendering," says Lesley Courcouf, of the AMA. "DSOs will become specialists in particular skills, such as asbestos removal or tree-cutting, and will be invited to bid in surrounding areas. In London, it is not worth several boroughs having special asbestos-removing teams, but they will still need to compete with the private sector."

This idealised prediction for the future of DSOs may not prove entirely accurate. Rutland, the smallest proposed unitary in England, intends to become a model "enabling" authority, the purchaser of many services, the provider of few. The council, come unitary status, wants to attract bids from six nearby authorities to run many of its functions, from refuse collection to care of vulnerable children.

Efficient DSOs are likely to find the temptation of winning work away from less competent neighbours quite irresistible. Some inner London authorities may consider that prospect with great discomfort.